Participating in a flexible spending account (FSA) is a great way to slash your tax tab.
Here's how it works: At the beginning of the year, you designate an amount to be taken out of your paycheck pretax to be set aside for eligible medical expenses. The keyword is "pretax," because the money is exempt from most federal and state income taxes. Contribute $500 to an FSA, and you could shave $75 to $200 off your tax bill, depending on your tax bracket.
Here's the catch: You have to use the money over the course of the year, or you lose it forever. For most plans, the end of the year is Dec. 31 -- leaving less than 30 days to get in any last-minute expenses for 2002. (A company might choose to run its flexible spending plan according to its fiscal year, instead of the calendar year. Ask the folks in your human resources department for your company's schedule.)
If you still have money in your flexible spending account, here are some of the ways you spend it:
- Visit the doctor for a checkup or the dentist for a holiday grin-cleaning. (Maybe Hermey the Elf has some appointments available.)
- Refill prescriptions.
- Get an eye exam, an extra pair of glasses, or even laser eye surgery.
- Consider physician-prescribed therapy, including weight-loss or smoking-cessation programs, and acupuncture.
- Do you need any special equipment installed in your home or car for medical reasons?
- Stock up on allowable over-the-counter items, such as contact lens solution.
But before you buy that cool new pair of prescription sunglasses, make sure you haven't already spent enough to get back all the money in your FSA. Review your receipts, checkbook records, and credit card statements for expenses you've incurred but have yet to submit. Also, some physicians and pharmacies will provide a record of how much you spent over the past year.
So if it's been a while since you got a checkup, had your teeth cleaned, or received medically necessary liposuction (just kidding), now is the time to get fit for the holidays. For a complete list of eligible expenses, consult IRS Publication 502 (pdf file).