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Know Your Benefits: Flexible Spending Accounts

Flexible Spending Accounts

Flexible spending accounts, or FSAs, provide you with an important tax advantage that can help you pay health care and dependent care expenses on a pre-tax basis. By anticipating your family’s health care and dependent care costs for the next plan year, you can lower your taxable income.

Essentially, the Internal Revenue Service (IRS) set up FSAs as a means to provide a tax break to employees and their employers. As an employee, you agree to set aside a portion of your pre-tax salary in an account, and that money is deducted from your paycheck over the course of the year. The amount you contribute to the FSA is not subject to social security (FICA), federal, state or local income taxes—effectively adjusting your annual taxable salary. The taxes you pay each paycheck and collectively each plan year can be reduced significantly, depending on your tax bracket. As a result of the personal tax savings you incur, your spendable income will increase.

The example that follows illustrates how an FSA can save money.

Bob and Jane’s combined gross income is $30,000. They are married and file their income taxes jointly. Since Bob and Jane expect to spend $3,000 in medical expenses in the next plan year, they decide to direct a total of $2,750 (the maximum allowed amount per individual, for that taxable year) into their FSAs.

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