Are FSA Contributions Tax Deductible?

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Are FSA Contributions Tax Deductible?

Because flexible spending accounts (FSAs) are financed by salary deferrals, donations to them are not tax deductible. Contributing to an FSA, on the other hand, reduces your taxable earnings since the account is financed with pretax cash.

For the 2021 tax year, the maximum salary deferral in an FSA is $2,750, increasing to $2,850 in 2022. (Previously, the limit was raised by $50 every year.)

Key Takeaways

  • An FSA assists workers in covering health-related expenses not covered by their insurance policies.
  • Because the account is financed with pretax monies, contributions to an FSA lower taxable earnings.
  • Because your $2,000 FSA contribution is made before taxes, it cannot be deducted.
  • With a doctor’s prescription, you may be able to utilize the FSA to help pay for a gym membership or massage treatment.

What Is an FSA?

An FSA is meant to assist workers in covering health-related expenses that are not covered by their insurance policies.

The details vary, but such programs may often be used to help pay for a deductible or prescription glasses. Some are suitable for alternative therapies such as acupuncture. You may be able to use your FSA to pay for a gym membership or massage treatment with a doctor’s prescription.

First aid supplies, such as bandages, are frequently covered. Many over-the-counter drugs and cures are covered, but only if they are prescribed by a doctor. Aspirin, cold medication, antacids, acne cream, ear wax removers, and wart removers are examples of common items.

Someone at the IRS must have created a list of which ordinary home goods are health products and which are just beneficial products.

  Total Tax Definition

Vitamins and herbal therapies, as well as cosmetic surgery and teeth whitening, are not covered.

How to Use an FSA

An FSA account, like a 401(k), is financed via deductions made straight from your salary. With an FSA, you put away a portion of your paycheck to be paid for qualified medical or dependent care expenditures throughout the year rather than paying out of cash. You cannot claim a tax deduction for your donations since the money was never taxed.

You choose what percentage or amount of your pay to defer into the FSA once a year, during your benefits enrollment period, up to a maximum. The postponed money is regarded to be paid using pretax cash. As a result, your gross revenue is reduced.

For example, if you earn $40,000 per year and opt to contribute $2,000 to your FSA, your gross income would be $38,000. Any federal, state, or municipal taxes you pay will be calculated using that figure.

An FSA account user cannot use it to buy typical household products such as toothpaste or shaving cream.

Don’t Over-Fund Your FSA

Employees should use prudence while filling their FSA accounts. Any leftover amount in the account is typically lost at the end of the year, however some plans include a grace period for submitting claims or rolling over outstanding funds.

At the very least, keep an eye on your FSA balance and make sure you spend it before the yearly deadline. If the yearly deadline is coming, you may go to the drugstore and stock up on some of the numerous over-the-counter treatments and items that an FSA will cover. But don’t go too far. The restrictions expressly prohibit storing things that cannot be used up within the year.

  Tax Accounting Definition

What Is the Tax Advantage of FSA Contributions?

Your taxable income is reduced because contributions to the account are taken from your paycheck before income taxes are calculated. Participants save 30% on the entire amount they donate to the account on average.

Can I Still Deduct Dependent Care Expenses?

Yes, but not for the same costs that you have previously been compensated for. If your entire expenditures were $7,000 and your DCA paid you $5,000, you may only claim the $2,000 difference.

The Bottom Line

Contributing to an FSA helps you to minimize your taxable income while also saving money on healthcare or dependent care expenditures since you pay for them with pretax cash. In other words, whether it’s laser eye surgery or sunscreen (as long as it’s greater than a particular SPF), you’re saving roughly 30%.

Using an FSA effectively requires good forecasting. While you can’t forecast everything, you should be able to schedule a visit to the dentist, certain over-the-counter drugs, or a prescription for vision correction. Depending on your circumstances, utilizing the account to cover some of those costs early in the year might help you avoid spending the account down as the year comes to a conclusion.

This article does not provide tax or legal advice and should not be used in place of such guidance. State and federal laws are constantly changing, and the information in this page may not represent your state’s laws or the most current revisions to the law. Please contact an accountant or an attorney for current tax or legal advice.

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