Did you know that you can deduct your medical expenses on your taxes (if you itemize)? However, your expenses need to be over 10% of your adjusted gross income, and you can only deduct those expenses over the 10% threshold. For many families, that 10% threshold is many thousands of dollars, so they are unable to deduct any of their expenses.
However, there is a plan offered by many employers called a Flexible Spending Account (FSA) that lets you use pretax dollars to pay for medical expenses. By using pretax dollars, you're automatically saving the money you would have paid in taxes.
So How Does a Flexible Spending Account (FSA) Work?
Each year, you need to estimate your expected medical expenses for the year and elect an amount to put into your FSA account during your Open Enrollment period. The catch is that you need to use the money during that year or you will lose it. So, you need to balance not having enough money to cover all your medical expenses vs. having too much and losing it at the end of the year. You can make your election once per year during annual enrollment, which usually happens near the end of the year (varies by company).
Some future expenses are easy to calculate. For example, you may know that both your kids will need to get their annual physical, and the copay is $15 for each. Plus, you may know that you need contacts each year, and they cost $250 a year. Add that up, and you know you'll have at least $280 in medical expenses for the year. And that $280 can save you $42 if you're in the 15% tax bracket (and even more for higher tax brackets).
You can use your FSA account for a wide variety of items such as doctor copays, prescriptions, glasses/contacts, etc. Click here for a list of eligible expenses.
Over the years, we used our FSA account each year to save money on our health expenses. In recent years, we've actually switched to a high-deductible insurance plan, which means that we have a Health Savings Account (HSA). It works much the same way as an FSA, except there's no use it or lose it rule. Any money that we don't use during a calendar year rolls over to the next year.
What about you? Do you have access to a Flexible Spending Account? Do you use it or have you been confused by how it works?