For those of you how don't know what they are, I'm in love with FSAs! That is Flexible Spending Accounts for those who don't use them and here is why I love them. **PS I am not a tax advisor or lawyer - kind of obvious I know from my obsession and compulsive need to budget, but I thought I should just probably state that for the record! You should do your own research on anything before solely taking the word of some schmuck on the internet!**
FSA can be used for several purposes, and I'm only going to rave about the two types, health care and dependent care, that I use, however, I think there is also one for communters but that gets into sticky stuff I don't understand. Okay, so the health care and dependent care FSA - the way these work, or atleast they way I've always seen them work, is that you select an amount to with draw from your pay check PRE-TAXES! Yes, that's right - before Uncle Sam gets his greedy lil hands on your money you elect for some of it to be taken out.
For us, as an example, I elected to take out $5,000 in the health care FSA and $5,000 in the dependent care FSA. Now before you freak out and think I've lost my mind, let me explain. The dependent care is easy we spend over $5,000 a child in daycare for one year. By using this pre-tax money we are able to save about $1,000 in taxes and apply more to our budget. The amount that we pay over the $5,000 is claimed in some weird way on our taxes (I use Turbo Tax and love it!, but it figures everything for me after I plug all the info in), however the most tax savings is realized by the pre-tax savings of the FSA.
Now on the healthcare FSA you've got to do a little more thinking. You can use this FSA to pay for most things medically related - co-pays, co-insurance, deductibles, prescriptions, over-the-counter drugs and more - HOWEVER, be prepared to keep and present reciepts (really the same thing as required by the IRS so if you are used to it it's really not that big of a deal)! My DH is some medical issues and has some maintenence prescriptions and doc apts that we can count on evey year, and you know with 2 kids there are going to be doctor visits involved - so normally we just try to estimate those things and take out that much, because if you don't USE it in that calendar year you LOSE it! But we are trying to have some dental work done for my DH, along with the delivery this summer, so we knew we could use the max of $5,000.
Between the 2 FSAs, using them has saved us over $2,500 *estimated* in taxes a year - which to me is well worth it. So my suggestion is - in the approaching months of open enrollment for benefits at workplaces, find out if FSAs are offered and consider them. Be smart and make sure it is something that works for you (single with no kids and no medical issues? may not be the best plan for you, but otherwise), because the whole purpose is to stretch your money!