Flexible Spending Accounts (FSAs) are optional plans that let you set aside your own pretax dollars to cover qualified expenses that you would normally pay with post-tax dollars. You pay no federal income or Social Security taxes on the money you place in these accounts. So, you lower your taxable income and pay lower taxes.
Some Rules about FSAs
- There are some IRS rules you should know before you choose an FSA.
- You can set up two separate accounts in your name — one for healthcare expenses and one for dependent care expenses. You may not take money out of a Dependent Care FSA to pay for healthcare expenses and vice versa, nor can you transfer contributions from one account to the other.
- If you pay for medical expenses with funds from an FSA account, you may not claim those expenses as deductions on your federal income tax return.
Healthcare Flexible Spending Accounts
You may set aside up to $2,500 per year in a Healthcare FSA to pay for eligible expenses such as medical, dental and vision expenses for yourself and/or your dependents that are not covered by any benefit plans.
Examples of eligible expenses include:
- Prescription drugs
- Orthodontic expenses
- Birth control pills
- Medical equipment rental
Note: Certain over-the-counter medicines and drugs, cosmetic surgery and health insurance premiums are not eligible for reimbursement, unless you have a written prescription from your doctor.
Dependent Day Care Flexible Spending Accounts
You may set aside up to $5,000 per year in a Dependent Day Care FSA if you are single, or married and file a joint tax return. If you are married and file separate tax returns, you may contribute up to $2,500, however, your contribution cannot exceed the lesser of your earned income or your spouse’s earned income.
Eligible dependents include:
- Children under age 13
- Older children (if disabled)
- Your spouse (if disabled)
- Elderly parents who spend at least eight hours a day in your home and who are unable to care for themselves.
You must claim these dependents as deductions on your federal tax return for the expenses to be eligible.
You can use a Dependent Day Care FSA to cover the eligible expenses for care of your dependents so that you and your spouse (if applicable) can work. It cannot be used for medical or other healthcare expenses for your dependents (these expenses may be eligible under the Healthcare FSA).
You may be reimbursed from your Dependent Day Care FSA for such IRS-approved expenses as:
- Baby-sitting or dependent care services in yourhome or someone else’s home
- Cost of a licensed dependent care center
- Certain expenses for dependent care by a live-in housekeeper
- Preschool expenses for dependents not yet in kindergarten
Expenses reimbursed through Dependent Care FSAs are the same kind that can be taken as federal income tax deductions and credits. You use either a Flexible Spending Account or federal income tax credit to gain a tax advantage. You cannot use both. Consult a professional tax advisor to determine the best method for you.