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Maximizing Tax Savings Through Flexible Spending Arrangements

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The IRS recently urged taxpayers to take advantage of their employer’s health flexible spending arrangements (FSA) next year. This program allows employees to contribute funds deducted from their paychecks to pay for medical expenses that aren’t covered by health insurance plans. Employees who wish to contribute to an employer’s FSA must state an intent do so before the first of the year. This is true even for employees who also participated in the program in 2017, so if you have questions about this or another tax-saving strategy, it is critical to contact an experienced Florida tax attorney before the start of the new year.

Voluntary Contributions  

Employees who choose to voluntarily participate in an employer’s FSA must decide how much they wish to contribute through monthly payroll deductions, and in some cases, employers can also contribute additional funds. There is, however, a limit to how much an employee can contribute, as the total cannot exceed $2,650. All amounts contributed to FSAs are not subject to federal income tax, Social Security tax, or Medicare tax. Unfortunately, self-employed individuals are not eligible for participation in this program.

Using the Funds  

Employees who choose to participate in an employer’s FSA can then use the funds deducted from their paycheck to pay for qualified medical expenses that are not covered by insurance. In fact, employees are permitted to withdraw funds from the account to pay for qualifying medical expenses even if they have not yet placed funds in the account. This includes co-pays, deductibles, and a number of medical services, such as dental and vision care. The purchase of hearing aids and glasses or contacts may also qualify, although employees should check with their employer on claim procedures and eligible expenses in advance.

Generally, employees who participate in this program and do not use their accumulated funds for eligible expenses, forfeit all unspent amounts. However, some employers give employees more time to use their remaining funds through a carryover option or grace period. Under the former, an employee can carry over as much as $500 of any unused FSA funds to the following year, while the latter option gives employees an extra two and a half months after the end of the year to incur eligible expenses. Under federal law, employers can offer either option, but are not permitted to offer both. Finally, there are no reporting requirements for FSAs, so participating employees do not have to include it on their income tax returns.

Call a Dedicated Tax Attorney for Help with Maximizing Tax Savings  

Employers are not required to offer FSAs, so it is important for employees to find out whether voluntary participation is an option and if so, whether their employer offers a carryover or grace period option for unused funds. Contributing to an FSA can help taxpayers maximize savings, so if you have questions about this or another type of tax program, please call 386-490-9949 today and a member of our dedicated legal team will help you schedule a one-on-one meeting with experienced Florida tax attorney Ronald Cutler, P.A.

Resources:

irs.gov/newsroom/plan-now-to-use-health-flexible-spending-arrangements-in-2018-contribute-up-to-2650-500-carryover-option-available-to-many

irs.gov/pub/irs-pdf/p969.pdf