FLEXIBLE SPENDING OR HOW I SAVED UP FOR AN I-POD AND SAVED ON TAXES

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Are you taking advantage of your company’s flexible spending program? Flexible what you ask? There are two types of flexible spending accounts that may be offered:

The first is a Health Care FSA which can be used to pay for eligible medical expenses not covered under a medical, dental, or vision plan. This includes deductibles, co-payments, and certain over-the-counter drug expenses.
The second is a Dependent Care FSA. This can pay for eligible dependent care expenses you incur so you are able to work (like child daycare).

How do these work? Once a year you, during enrollment, you indicate how much you want to contribute to each of these accounts. When the new year starts the amount you wish to contribute will be deducted from your paycheck before taxes (this is important) in equal installments throughout the year (for example, if you contribute $1200 and you get paid twice a month then $50 will be deducted from each paycheck).

When you incur these expenses you send documentation for the expense to your company’s account provider. This can be a simple as faxing a couple of pages.

Now why would you want your company to take more out of your paycheck? Remember I said the money is taken out before taxes? This means you are not paying taxes on that money. Legally! Really. If you make $40,000 and you contribute $2000 then you will only be taxed as if you made $38,000! That may not sound like a lot but remember every dollar you can keep adds up.

You have to be careful though because there is a catch – any money you don’t use/claim is forfeited. Make sure you are conservative in you estimates!

Of course make sure you check with your benefits department to find out all of the particular details of your company’s plan.

What about the I-Pod, you ask? Well, one year I knew I would be buying new glasses (which is an eligible expense) on top of my other expenses so I made sure to include what I thought the glasses would cost in my yearly contribution. I waited toward the end of the year to file for my reimbursement which included, among other things, the cost of my glasses. I was able to take the check I received and easily pay for a new I-pod. I was going to buy one anyway but this was a nice way to save up for it and the way I see it is I paid for it with tax-free money!

So what are you waiting for? Unless you like paying more taxes than required go find out how to enroll in your company’s flexible spending account!

Tagged as: Money, planning, Saving, Taxes, tips, Work

{ 2 comments… read them below or add one }

1 Riley (1 comments) October 19, 2007 at 2:08 pm: Wow. That’s interesting how you were able to essentially save tax-free to buy an I-Pod. Thanks
2 Free From Broke (113 comments) October 19, 2007 at 2:17 pm: Thanks for the post Riley. Glad you enjoyed it!