Here are some examples of how a Flexible Spending Account could benefit you:
Example 1: No FSA Account with Fixed Medical Expenses
Income = $50,000 Tax Rate = 40% Medical Expenses = $2,000 Net Income will be = $28,000
Example 2: Fixed Medical Expenses Reserved in an FSA Account
Income = $50,000 Tax Rate = 40% Medical Expenses = $2,000 Net Income will be = $28,800
There is a savings of $800 in example 2, IF you spend everything in the FSA account by year’s end.
Example 3: Child Care FSA
In 2007, a married couple filing a joint federal tax return with taxable income of $80,000 will save federal taxes of $1,250 (25 percent of $5,000) if one of the spouses contributes $5,000 to his employer’s FSA account. Also, social security taxes will be reduced by just over $300 and Medicare taxes by just under $100.
Additional benefits in all three examples: The federal tax deduction reduces your taxable (adjusted gross) income. This may allow you to have more itemized tax deductions, or increase the amount allowed for personal exemptions.
Always be careful about how much money to put aside for your FSA, though, because you forfeit any amount that isn’t used during the calendar year (plus a grace period of around 45 days). And always check with your tax professional or do the math yourself with computerized tax software before deciding.