FSA Calculator

FSA Calculator: How You Save Money with a Flexible Spending Account

Understand whether a FSA is for you

Introduction to Our FSA Calculator:

A Flexible Spending Account offers many taxpayers a significant tax savings because you pay for out-of-pocket expenses for either medical needs or dependent care with pre-tax money.  Usually when you buy things with money we made at work you’ve already had taxes taken out of that money, so $1000/week in earning becomes only $7-800 in spending power or so.   Thus any time you can spend pre-tax money you are at an advantage by a percent equal to what you tax rate is. So the simplest form of FSA Calculator is knowing what your actual Federal tax rate – not the bracket you are in but what percentage you end up paying when all deductions are taken – and assume you are getting that much of a discount on any eligible expenses.  It’s not that simple, however, because any FSA Calculator would need to take into consideration other deductions that you’d need to forgo in order to use a flexible spending account.  The following shows how you can figure this all out – though not automated, this means of using a FSA Calculator is not difficult.
Of course before we get started with our FSA Calculator we have to introduce the caveat that all of this only works if are sure that you spend out the amount you set aside.  Otherwise you’d have to add back those remainders so that they reduce the advantages.  Also note that this math may not work for those with a unique tax situation that might cancel out the benefits altogether – often people with very high or low incomes, but sometimes people who have a lot of deductions as well.
Assuming you will spend out what you put aside and you are in the majority for whom their tax situation supports a flexible spending account, here is our FSA Calculator that can help you understand the math that makes a Flexible Spending Account advantageous:

The Math behind a FSA Calculator:

The ways a flexible spending account saves you money is best demonstrated with some math:
Dependent CareHealth Spending
Taxable income (your income after various deductions, but before it is taxed):$50,000$50,000$50,000$50,000
Pre-tax FSA contribution (what you put aside in your flexible spending account):(5,000)0(2,000)0
Taxable income after FSA (your new taxable income now that you’ve subtracted your FSA):45,00050,00048,00050,000
Federal income and Social Security taxes (this amount is approximate, based on this income level): $14,692 $16,325 15,672 16,325
Expenses paid without FSA (5,000) (2,000)
Money you get after taxes and expenses:30,30828,67532,32831,675
Savings with a FSA:$1,633 ** $653

* We have used a salary of $50,000 and a tax rate of 25%.  For FICA we have used 7.65%.  Of course you would need to use your own salary and tax rate – and there may be other factors you’d need to include as well.

** It should be noted that a percentage of dependent care expenses are often deductible if you don;t use a flexible spending account, most commonly by the dependent care credit.  Usually a flexible spending account is more advantageous, but not always.  This FSA Calculator from Aetna can help you do that math.

The above chart shows that in simple and common tax situations you can save money by paying for your dependent care, medical and health, and other known expenses through a FSA. The difference is where the expenses fall – above you see the $5000 or $2000 appearing either before or after taxes have been taken out.  When they appear before, that much less income is taxed in your pay, effectively saving you the taxes that you would have had to pay on that money.  That said, there are some people who do not benefit from a flexible spending account at all, and it usually has to do with a unique and less common tax situation.

 Who might not benefit from a Flexible Spending Account

As you can see from the FSA calculator above, many tax payers benefit from a flexible spending account, whether a dependent care account or a health spending account.  The logic is obvious – spending money that is there before taxes are taken out usually brings advantages.  That said, there are some filers who do not benefit as much or at all, and that includes people who will make a smaller income and therefore not owe federal taxes at all, and on the other end of the spectrum some very high income earners who have a lot of deductions may not benefit as much.  The best way to tell if a flexible spending account will benefit you and by how much is to either ask the person who did your taxes or, if you used a tax preparation program, re-enter the numbers with the effects of a flexible spending account included.  We can’t go into every tax situation here with our simple FSA calculator, and would be hesitant to try since some tax situations involve a lot of detail and intricacy.

The biggest pitfall to a Flexible Spending Account

Of course the biggest problem you could have with a dependent care of health spending FSA is not spending out the money put aside for eligible expenses.  This may include submitting expenses that themselves are not eligible, or simply not calculating how many eligible expenses you will have.  Take the example in the chart above for medical expenses.  Your savings are $653 per year, but if your eligible expenses fall $700 short you will actually lose money.  In other words, while a flexible spending account may be a great idea in general, and your tax situation may very well support it, you still have to make sure your expense profile also supports it.

This is an introduction and general information about the tax advantages of your flexible spending account using a simple FSA calculator, and a description of how to calculate how much you might save with a dependent care or health spending account.  As we mentioned above, the best way to determine your savings, and to rule out the unlikely but still possible idea that other tax incentives may be a better bet, is to run your potential tax situation through a tax program or by a tax advisor.