I like to say that there a very few legal ways we can get away with in avoiding paying more income taxes then we have to. It definitely helps to know and understand what methods are available to you in order to lower your tax liability. Who doesn’t want to take home more of their pay and pay less income taxes whenever possible?
Most individuals that I’ve come across get overwhelmed when it comes time to electing benefits and reviewing their available options, simply because it takes too much time, energy and effort into researching all this stuff and let’s face it, none of it makes sense until you actually have to use the benefit. So now on to the good stuff!
In this example I am going to try to explain the benefits of an FSA as simply as I can so that you can understand exactly how you save from paying less income taxes.
Let’s say you make $500.00 of gross income on your pay check each week but you want to take advantage of setting money aside to pay for qualifying medical expenses (Which I will explain in greater detail later) by using your companies FSA plan.After giving it, some thought you decide that you want to contribute $50.00 each week into the FSA plan. Great! Because you have opted to take advantage of a “Pre-Tax Deduction” which is what an FSA is considered, now instead of being taxed on the full $500.00 in gross income, you will now only be taxed on $450.00!
$500.00 Weekly Gross Earnings
-$50.00 Weekly Payroll Deduction for FSA
__________________________________
=$450.00 In taxable earnings
Normally without the FSA deduction you would be taxed on the full $500.00 dollars’ worth of earnings.
So now you are asking ok, what’s the catch? A couple of key things you need to understand when it comes to FSA plans. You have to estimate (Guess) exactly how much you think you would need to put aside into the FSA plan to cover most of your medical expenses for the plan year because if you don't use all this money before a certain time limit you will loose it.
Don't worry the IRS gives you plenty of time you just need to be smart about how much you contribute.
Example of qualifying medical expenses:
*Not an exhaustive list of qualifying expenses
Prescription Co Payments
Dr visit Co Payments
Cost of Eye Glasses
Perhaps maybe you need some dental work
Contact Solution’s
One of the sweet things about participating in an FSA plan is that you don’t have to have made the full elected annual amount of payments before you can start using your FSA money. This is something that is not very well known or talked about by employers because you are taking an advance on that money.
Example:
You elected to contribute a total of $1,000.00 into the plan by having $50.00 deducted from each paycheck, however you know you are going to have a medical procedure coming up that is going to cost you $1,000.00 out of pocket. You don’t have to wait to have paid $1,000.00 into the plan before you can use the $1,000.00 you elected to contribute.
I wanted to make this explanation as short and to the point as possible. There are some other things you need to be aware of so please feel free to reach out to me if you have any questions or would like more information.
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