2017 FSA Changes: How Flexible Spending Accounts Can Save You on Taxes

Flexible spending accounts are available to millions of American workers, and FSAs can save you a bundle on your taxes. Every year, the amount that you can contribute toward an FSA typically changes, and that can give you even more opportunities to cut your tax bill. Below, we'll look at the 2017 FSA changes that you can expect to see, along with giving you a closer look at how flexible spending accounts work and why they're so valuable.

2017 FSA changes

The most important change that will take effect in 2017 for FSAs is the amount that you're allowed to contribute toward healthcare expenses. This amount is tied to inflation, and after remaining unchanged last year from its 2015 levels, the maximum contribution limit will rise by $50 in 2017 to $2,600.

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Meanwhile, contributions to FSAs for dependent care purposes aren't tied to inflation, and so they remain the same every year. Limits for dependent care FSAs are $5,000 for everyone except those who are married and file separate returns, who have a $2,500 limit. However, for joint returns, dependent care FSA contributions can't exceed the earnings of the lower-earning spouse. This disallows FSA contributions for workers whose spouses don't have earned income and can reduce maximum contributions for those whose spouses work part-time and don't earn at least $5,000 during the year.

What to watch for in your FSA in 2017

For those who aren't as familiar with flexible spending accounts, the general idea behind the FSA is that you can have money taken out of your paycheck to go toward healthcare or dependent care expenses. This money is withheld on a pre-tax basis, so you won't owe income tax on the money that gets diverted from your paycheck into the FSA. Even better, contributions to an FSA are also exempt from payroll taxes, and so you can save up to an additional 7.65% in money that would otherwise have gone toward Social Security and Medicare taxes.

Along with those tax benefits, FSA contributions come with some strings attached. The essential thing to know about FSA contributions is that you typically have to use the money by the end of the year, or else you lose it forever. You'll typically have up to three months to submit those expenses for reimbursement, but they must have been incurred during the calendar year.

There are, however, a couple of options that employers have to help ease that blow. Some employers offer a grace period that will let you incur FSA-eligible expenses as late as March 15 of the following year. That can help you use up any extra money in your FSA. In addition, with healthcare FSAs only, employers can offer you the option to carry forward up to $500 into the following year without forfeiting it. Employers can offer either the grace period or the carry-forward option, but not both.

Because these features are optional, you should be sure to check with your employer about your particular FSA. Otherwise, you could get a nasty surprise by assuming your plan has a feature that your employer hasn't actually chosen.

Are FSAs worth it?

Whether FSAs are worth using depends on your personal situation. If you have established and predictable healthcare needs, then putting aside money to cover them in an FSA carries no risk and only gives you the tax rewards associated with the accounts. On the other hand, if you need relatively little healthcare, then the risk of having to forfeit unused money argues for being more conservative with FSA contributions.

Also, keep in mind that using FSAs can make you ineligible for some other tax breaks. For instance, money spent on dependent care expenses using an FSA can't be used to claim the Child and Dependent Care Tax Credit. If you have large enough dependent care expenses that you use up your entire FSA balance, however, then you can claim the credit on the excess.

FSA users will get a small boost to their ability to use the tax-favored accounts in 2017. If your employer offers an FSA, be sure to see how much it could save you and whether it's worth the risk of having to forfeit a portion of your savings if you don't end up needing it.