FSA's and tax breaks?

Question

my company is encouraging me to enroll in the FSA plan. I dont know if it is worth it for me. My question is, if I get the plan and put in like $1000 or $1500 and I make almost $60,000/yr, is it worth it for me? Tax- wise? B/c thats why ppl get the plan, for the tax benefits, but if I only save a minimal amount, I dont want to do it b/c I dont want $40 or $60 taken out of every paycheck. Thanks in advance!

Answer 1

Well, at your income level your marginal rate is probably 25%. The FSA will save you $375 if you put $1,500 into it and use all of it for covered medical expenses. The only caveat is that it's a use-or-lose benefit. Anything left in the account at the end of the year (or within a limited time after you leave the job) is forfeit forever.

The FSA basically allows you to take a deduction for medical expenses without having to deal with itemizing or the 7.5% AGI limitation that would otherwise apply.

Answer 2

This if from IRS publication 969: Health Savings Accounts and Other Tax-Favored Health Plans.
A health flexible spending arrangement (FSA) is usually funded through voluntary salary reduction agreements with your employer. The employer may also contribute.

You may enjoy several benefits from having an FSA.
*Contributions made by your employer can be excluded from your gross income.
*No employment or federal income taxes are deducted from the contributions.
*Withdrawals to pay qualified medical expenses are free. You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.

At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.

Generally, contributed amounts that are not spent by the end the plan year are forfeited. For this reason, it is important to base your contribution on an estimate of the qualifying expenses you will have during the year.

Flexible spending accounts are "use-it-or-lose-it" plans. However, the plan can provide for a grace period of up to 21/2 months after the end of the plan year. If there is a grace period, any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer is not permitted to refund any part of the balance to you.