Is A Flexible Spending Account Right For You?
Many Americans overlook the Flexible Spending Account (FSA) option at their companies when open enrollment comes around in December for the next year. There could be many reasons for this, such as lack of knowledge about the account type, or the unwillingness to plan out future expenses, or it could simply just be overlooked. But taking advantage of this tax-saving vehicle could help you or your family out during times of need and lower your tax bill.
An FSA account allows employees to contribute money on a pre-tax basis to be used for certain health or dependent care costs that arise during a calendar year. The money that you specify up to the limit is deducted from your paycheck on a pre-tax basis, lowering the amount of income on which you are taxed.
FSA account holders have a limit, which is $2,550 per employee for 2016 (and a minimum of $120). If you and your spouse both have FSA’s, then you both may contribute up to the maximum allowed per year. The annual contribution is typically deducted over all pay periods in equal amounts. In the case where an employee is new to a company and enrolling mid-year, the elected amount would be divided among the remaining pay periods.
According to a recent survey completed by WageWorks, Inc., more than half of those surveyed admitted to understanding FSA’s the least of all available benefits and 86 percent had at least one misconception about how the FSA program works. With greater knowledge, more Americans could take advantage of this opportunity to not only save on taxes but plan for some yearly expenses.
It also must be noted that a contribution amount can’t be changed or cancelled during the calendar year once determined, unless there is a marriage, divorce or birth of a child. For a dependent account, contributions depend on annual earnings in the prior year and tax filing status, along with other factors. The last time the IRS increased the limit for FSA accounts was 2014. Employees must re-enroll every year, as benefits don’t automatically extend into the next year. Additionally, FSA’s cannot move from employer to employer.
Contributing to an FSA account certainly has its benefits if you anticipate health or dependent care costs for yourself and your family. The more you contribute, the more the tax savings. The one drawback is, that if funds in the account are not used before the end of a calendar year, they will likely be lost. It is possible that an employer could grant a small amount of the account to be used in the next year if unused in the specified calendar year, but this isn’t too common.
Would you like to learn how to achieve your best financial future? Simply request a call from a Bayntree financial advisor today.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.