Taxes and health care in the SAME entry?! I promise I'll make this quick and easy -- while saving you some cash in the process. While you're wading through all those forms during your annual health care open enrollment, make sure to look for information on flexible spending accounts. At their core, these accounts let your employer take money from your account before taxes that you can then put toward some medical costs, such as co-pays.
Think of it as a forced savings that is worth more than if you just put the money in a locked box under your bed.
Here's how the Associated Press describes the these tax break accounts:
These flexible spending accounts can help employees save 20 to 40 percent on medical expenses not covered by insurance, such as braces, glasses, and contact lenses.
Employees should estimate their out-of-pocket health care expenses and have that amount withdrawn from their paychecks over the course of the year. The money contributed to a flexible-spending account is not subject to payroll tax, which effectively lowers participants’ taxable income, but with the condition that they must spend the money before the end of the year. Money left in the account on Dec. 31 is forfeited.
Wageworks estimates about 75 percent of US employees have access to a flexible savings account, though just 20 to 25 percent participate, mainly because of concerns about the ‘‘use it or lose it’’ rule.
The health overhaul makes one major change to flexible spending accounts beginning in 2013: Health care flexible spending accounts will be capped at $2,500, which could limit tax savings for people with large families or expensive medical conditions. The government previously didn’t limit how much workers could set aside, but most companies capped contributions at around $5,000.
Do you take advantage of these accounts? Do you find them useful or just a use-it-or-lose it trap? Discuss in the comments section.
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