How to Use Flexible Spending Accounts

Are flexible spending plans worth the paperwork headache?

Introduction

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Q: We currently have one child in daycare and some family healthcare expenses that are not covered under our insurance. Is a flexible spending plan worth the paperwork headache?

A: Yes, but you have to plan it right or you could forfeit some of the money you set aside. Don't worry about the paperwork. It may take an hour or so to set up the account initially, but once you do, it's easy to manage.

Flexible spending plans are special accounts offered by employers to enable workers to pay for up to $5,000 in childcare and $2,000 to $5,000 in unreimbursed medical expenses with pretax dollars each year. How much will this save you? Multiply your expenses by your tax bracket. For example, if you're in the 27% tax bracket (taxable income of $45,200 to $109,250 on a joint return, $36,250 to $93,650 if single and filing as head of household) and put $5,000 into a flexible spending account (FSA) for childcare, you'll save $1,350 in taxes.

Here's how FSAs work: At the beginning of the year, you estimate what your childcare and/or medical expenses will be for the year. Your employer withholds an amount from each paycheck and puts the money into a special account. This money is not reported as wages on your W-2. When you incur a childcare or medical expense, you submit a claim to your employer, who will reimburse you out of this account.

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