Should I put money into a flexible spending account?

Question

We have the opportunity to put money into a flexible spending account through work. Should we do it for a daycare since we could also deduct daycare from our taxes? Also, we can put money in for medical, we currently can put in $1000 a year. But we just bought a hot tub that we plan to deduct from our taxes. So would it be better not to put any money into the flexible spending or keep the $1000 and use the rest to deduct from our taxes?

Someone asked about the Hot Tub. I do have a script from my dr and I have alot of medical expenses from an accident between surguries and Phyisical Therapy Visits. My insurance doesnt count any of my Dr. co pays or prescription medicine toward my total out of pocket expenses which is $1000 per year. My children also see alot of specialists for allergies and asthma and my daughter is on some expensive medications. So I havent figured it out, but I am guessing that my total is going to exceed the 7.5%.

Answer 1

As for the daycare flex spending account, you would see more benefit from the flex spending account than you would see from claiming the dependent care credit. The flex spending is taken out pre-tax, so you save tax based on your marginal tax rate, while the dependent care credit percentage is capped, and the cap is typically lower than your marginal tax rate.

I'm not sure how you can deduct the cost of your hot tub from your taxes. You cannot deduct as a medical expense unless the hot tub was specifically prescribed by a doctor for medical reasons. Also, medical expenses are limited to the amount that exceeds 7.5% of your adjusted gross income. This limit on medical expenses would also apply towards medical expenses that you would normally submit to the medical flex spending account for reimbursement. So having a medical flex spending account is also more beneficial to you for tax purposes, since the flex spending contributions is taken out pre-tax, which saves you tax based on your marginal tax rate, and is not subject to the 7.5% limit on medical expenses claimed as an itemized deduction.

If you paid for the hot tub with a home equity loan, then the loan interest would be deductible as mortgage interest on your principal residence.

Answer 2

The main reason to put money in a flexible spending account for child care and/or medical expenses is that the money is tax free. You do not pay payroll taxes on money deducted from your pay that goes into the FSA. In addition, I like the way it helps me to have a fund to cover the deductible on my medical insurance expenses and the amounts not covered such as prescriptions and the 20% I have to pay for doctor's visits. If you put money into an FSA you can still deduct daycare and medical expenses when you itemize expenses on your taxes. Be careful to calculate how much to put into an FSA because any that you don't use, you lose.

Answer 3

Both parents do not need to be working. If the flexible spending account is offered through the working parents job.

Answer 4

you actually get the standard year to file claims against your FSA and now you get a grace period at the end of 2.5 months

it might be wise to use a FSA for your daycare costs and any other fixed health costs you have.

Answer 5

Be careful how much you put in, because any you don't use you lose at the end of the year.