Your FSA’s Tax-Free Benefits (And How to Maximize Them)
by Susannah McQuitty
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Tax-free benefits on health and medical needs has never been handier than in 2020, so if you have an FSA (or Flexible Spending Account), you’ve likely been taking full advantage of the account.
Maybe you just opened an FSA, or perhaps you’ve had one but didn’t know much about how it worked tax-wise or what sort of purchases would qualify for FSA spending. Let’s look at what makes an FSA tick and how you can use it to supplement your health spending.
What is a Flexible Spending Account (FSA)?
An FSA is basically a savings account used only for health and medical purchases. FSAs are employer-sponsored accounts, because your employer allocates pre-tax dollars to your FSA. You get to choose how much goes in (provided it’s within the minimum and maximum contribution amounts), and then that amount is set aside to be deposited into your FSA before you get your paycheck.
FSAs are unlike savings accounts, however, because funds don’t roll over from year to year—that means any unused money in your account expires after December 31 of that year.
What does “tax free” mean for my FSA?
One of the major benefits of FSAs is that your contributions are tax free—your employer deposits a portion of your income directly to the account, reducing taxable wages, and as long as you spend your funds on qualified purchases, you won’t be taxed once you use the money, either.
That adds up to major savings over the course of the year. For example, median U.S. household income is $59,000—if you maxed out your FSA contributions in 2020, you’d have an account balance of $2,750 and you’d save about $1,000 in payroll taxes.
What health and medical needs can I pay for with an FSA?
The list of items you can purchase with an FSA was already big, but in 2020, that list grew even more due to the Coronavirus Aid, Relief and Economic Security (CARES) Act. Qualifying purchases include:
- Over-the-counter meds like pain killers, cold relief and allergy meds (CARES Act)
- Menstrual care (CARES Act)
- At-home COVID-19 test kits
- First aid kits and bandages
- Sunscreen and skin care
- Doctor’s co-payments and specialist visits
- Prescription glasses or contact lenses
- And more!
With so many products and services that qualify for FSA spending, it’s easy to see how your taxes can benefit. You can also check out tools like FSAstore.com to look up all kinds of qualifying goods and services.
Is there no way to extend the deadline for FSA spending beyond December 31?
That depends on your employer and your FSA plan. Some plans have a grace period of up to 2.5 months, while others allow up to $550 (increased by the IRS from $500 on May 12, 2020) to simply roll over to the next year. If you need extra time to use your funds, talk to your employer about possibly extending your FSA deadline or using the $550 rollover.
Easy ways to save on your taxes—Using tax-free options like an FSA and filing with 1040.com
For saving on your taxes, easier is better. Having an FSA makes reducing your tax liability painless and takes very little effort at all.
That’s our goal when it comes to filing your taxes at 1040.com, too. Our tax-return walkthrough is designed to be as user-friendly as possible, and our flat rate $25 pricing means you know exactly how much our services will cost from “go.”
Keeping it simple is what we’re all about, especially when it comes to your taxes! If you haven’t yet, be sure to create a 1040.com account so you can stay in-the-know with tax dates and deadlines, and be sure to file the simple way in 2021!
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