I had a client recently ask me if I thought it was a good idea to participate in a Flex Spending account offered by his employer. My answer, in almost every case, is “YES!” I also take advantage of Flex Spending Accounts through my spouse’s employer.
The two most common types of accounts are Medical and Child Care. I don’t want to get too involved, but I will answer some questions:
QUESTION 1: Don’t we get to take these expenses as a deduction on our tax returns anyway?
NO, you may only get to deduct a portion of these expenses on your tax returns, if any. There are phase-outs and income limitations on both medical and child care expenses.
QUESTION 2: If I take advantage of Flex Accounts, do I need to keep receipts?
YES…you will need to provide proof (i.e. receipts) to the third party holding the account funds. What happens is that money gets taken out of your paycheck and then goes to a third party. When you incur the medical or child care expenses, you submit a form to the third party asking for your money back AND YOU WILL NORMALLY HAVE TO SEND THEM SOME SORT OF PROOF that the expense was paid.
QUESTION 3: What is the primary benefit of getting involved in Flex Spending?
The primary reason is you get DOLLAR FOR DOLLAR tax treatment. The amount that you elect to be taken out of you paycheck saves you DOLLAR FOR DOLLAR in taxes. It’s hard to top this type of treatment.
QUESTION 4: What is the primary reason people don't take advantage of Flex Spending?
The risk of “use it or lose it”… all of these Flex Spending accounts, from my experience, need you to figure out a dollar value that you are going to spend by the end of the year. This sometimes is a difficult calculation. If you think you are going to spend $1,000 on child care throughout the year, but end up only spending $900, you lose $100...that’s right, you just “donated” $100 to who knows who.
If you are struggling with the “use it or lose it” concept, my advice to you is simply do what I do….I calculate what I think I am going to spend by the end of the year AND ROUND DOWN. If I think I am going to spend $1,000 on child care, then I may only elect to have $750 go into the Flex Spending account. If I happen to spend more the $750, the excess gets factored into the Child and Dependent Care Expense (FORM 2441) of my tax return and I get to apply this credit towards my tax liability. Please note, this credit is NOT DOLLAR FOR DOLLAR.
One point on medical expenses: for those who may need a surgery or are choosing to have surgery (i.e. Lasik eye surgery), it would be a great idea to take part in a Flex Spending medical account. Why?
The answer is that you know with some certainty what it is going to cost for that surgery, and it’s usually not cheap…which equates to a rather nice tax savings.
If you have any more questions regarding this topic, please feel free to give me a call. 763-786-7899.