Money Saving Monday Tip #2 – Reduce Your Taxes and Increase Your Income
1 Corinthians 6: 19-20 – Do you not know that your body is a temple of the Holy Spirit, who is in you, whom you have received from God? You are not your own; you were bought at a price. Therefore honor God with your body.
This is a new series I am starting today. Each Monday, I’ll have a post that provides a money saving tip that you can implement.
Many employers, including mine are offering Flexible Spending Arrangements (FSAs), or more commonly called Flexible Spending Accounts or Flex Accounts. A flexible spending account allows you to allocate pre-tax dollars to a special account managed by your company or 3rd party. In other words, any money pulled from your paycheck to place into an FSA is NOT subject to payroll taxes.
Various plans offer different options for how the money can be used. Three common plans allow you to use the money for:
- Qualified Medical Expenses
- Qualified Childcare Expenses
- Qualified Parking Expenses
FSAs can offer substantial tax benefits and savings. An additional benefit being offered by many FSA providers is the availability of FSA Debit Cards. These debit cards allow you to utilize the money in your FSA at the doctor’s office, hospital, daycare facility, etc just like you would a standard debit card. The benefit of course is that the funds come out of your FSA directly. The convenience of this new option is expected to increase FSA participation significantly.
Recently, FSA accounts were changed to allow expenses of over the counter medication as well, such as Advil, Tylenol, Claritin, Cough Syrups, etc. This capability makes them even more attractive.
Tax Savings Example
As an example, lets take an employee that is in a 28% federal tax bracket, a 5% state tax bracket.
No FSA Account
Income = 50,000
Tax Rate = 40% (28% federal + 5% state + 7.65 FICA)
Yearly Medical Expenses = $2,000
Net Income = 28,000
With FSA Account
Income = $50,000
Tax Rate = 40%
Yearly Medical Expenses = $2,000
Net Income = 28,800
As you can see, by placing the money in an FSA and using it, the overall taxes are decreased and thus the net income is increased.
Please note my emphasis on using your FSA money. That is the one big drawback to utilizing a FSA, if you don’t spend the money, you lose it. This is fairly easy to manage though, it just requires a little organization.
All you have to do is determine your average medical expenses per month. If you have been following a budget, this should be easy to do, if not, than you will have to make an educated guess. The first year I signed up, I was very conservative and way underestimated. The second year, I did the opposite and contributed too much. By the third year I had it just right.
If you find you are contributing too much, than just go get that physical you’ve been putting off, or stock up on over the counter medicines you use on a regular basis. In my case I wear glasses, so I purchase a new pair or even get a set of prescription sun-glasses. That usually takes care of any remaining amount.
One other minor drawback worth mentioning, is that all claims have to be made by the plans cut-off date, which varies from company to company. Claims submitted after this date will be denied. I make this point to emphasize being very organized with your expenses and making sure you turn your claims in on time. I generally do mine monthly.
Since I do mine monthly, I have stopped budgeting for any medical expenses, since due to the FSA, my expenses are a wash each month. What we spend, we just expense and get back, plus I pay less taxes!
So, visit your companies HR site or department and ask them if they have a FSA. If so, seriously consider signing up. It will make your budget easier and provide you with lower taxes and increase your income!