Pay Less Tax With an FSA

Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am here with Mary Beth Franklin, the Senior Editor of Kiplinger's Personal Finance magazine to talk about flexible spending accounts. Mary Beth, what is an FSA? Mary Beth Franklin: It's a terrific French benefit that employers can offer to their employees. You get to put pretax dollars into a special set aside account and then you use that money to pay some of your normal bills. Kevin McCormally: What kind of bills? Mary Beth Franklin: Mainly medical bills and also child care expenses. Kevin McCormally: Let's talk about the medical FSA. What kind of bills can you pay with these pretax dollars? Mary Beth Franklin: Anything that you are paying out of pocket, like those copayments for prescription drugs or deductibles before your insurance kicks in or even things that insurance might not even cover, braces for your kids, your trip to the chiropractor all sorts of things. Kevin McCormally: What about the child care FSA? Mary Beth Franklin: As long as you need child so you can work, you can spend up to $5,000 dollars on child care expenses with these pretax dollars. Kevin McCormally: Okay, I understand Kiplinger's has way for some tax payers to actually get a bigger boost above the $5,000 mark. Mary Beth Franklin: It's right. It's a little complicated, but there are two sorts of tax breaks. One you can spend up to $5,000 with your flexible spending account or there is a tax credit for up to $6,000 of child care expenses. If you run $5,000 through your flexible spending account, don't forget there is an thousand dollars there that you will qualify for a tax credit and that can save you about $200. Kevin McCormally: That's great. One final question. What about this use it or lose it rule? Mary Beth Franklin: Well, this really scares a lot of people. Normally if you don't use all the money in your flexible spending account by the end of the year, it's gone. But face it, there are lots of way to spend money. At the end of year it can be buy new eye glasses or contacts, get your dental appointment or an eye exam and even better the IRS has extended the grace period. It's voluntary, but most employers allow you to go all the way up to about March 15 to use those dollars. Kevin McCormally: Thank you very much.