If you have access to a flexible spending account for medical or dependent care, you should be taking advantage of the tax savings. But, these accounts can be tricky… so let’s discuss them for a bit.
A flexible spending account is set up through your employer. It is almost like a savings account, except it doesn’t earn interest. What is does is allow you to set aside money tax-free. This reduces your overall income reported on your tax statements. Depending on the amount of expenses you have, this can move you into a lower tax bracket or at the very least, have less to pay in taxes overall.
The way these accounts are set up is you designate a certain amount to be removed before taxes from your paycheck. The employer then holds this money aside and you have to file documents to receive reimbursement for payments you make to either medical or dependent care bills. A good example is childcare. If you pay $1000 a month in childcare costs, you could remove that from your paycheck before taxes. Then, when you pay your bill to the daycare center, you use the receipt to claim that money back. While yes, this can be a lot of paperwork; in this scenario, you would reduce your income by $12,000 a year – thus, saving you the taxes on that income amount.
Now, there is one small trick to flexible spending accounts. Whatever money you don’t use, you lose. Therefore, pay close attention to your budget. Be sure to set aside slightly less then your budget says for those expenses, and then you will be less likely to come up short. You also do have a year to compile the paperwork and claim your money, even though your employer removes a set amount each month. As long as you keep close tabs on your receipts and the end date for your benefit year, this process can certainly save your family money.
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*Take Advantage of Flexible Spending Accounts