Financial Abundance Guide

If your company offers a Flexible Spending Account (FSA), consider signing up for it in 2008. With an FSA, you request a “salary reduction” to fund the FSA. The FSA funds can be used to pay for qualified medical expense and/or for dependent care. Dependent care is usually used for child care expenses, but may also be used for adult day care for senior citizen dependents, such as parents, if they live with you.

The advantage of using FSA funds to pay for qualified expenses is that the amount used to fund your FSA is not subject to federal, state or payroll (FICA) taxes. If you are in the 25% federal tax bracket, with a state income tax of 5% and a payroll (FICA) tax of 7.65%, you will effectively be able to buy your health care and dependent care services at a discount of 37.65%.

The maximum funding amounts allowed by the IRS are $5,000 for medical care and $5,000 for dependent care. Assuming you are in the 25% federal tax bracket and have 5% state taxes, $10,000 total funding would yield a tax savings of $3,765, providing a 37.65% “discount” on the purchase of these services.

Be careful not to overestimate your FSA requirements. Any funds remaining in your FSA, at the end of the benefit coverage period, will be forfeited back to the company.