Ok. So, what I am about to say is neither groundbreaking nor ridiculously complex, but it is able to save LD and I just over $800 on a $3500 surgery. What is the trick? It is simple: know how to use your FSA effectively.
For those of you who don’t know what an FSA is, it is a flexible spending account that comes out pre-tax usually through your employer. You can choose how much or how little you put towards your flexible spending account, but be careful because that money becomes use it or lose it at the end of the year. There are different FSAs for medical, dependent care, commuting, and parking expenses, but today I am focusing on the medical FSA.
Because this money comes out pretax, you not only save the money you would have spent in taxes, but you also have the possibility of lowering your tax bracket if you are borderline between two. I don’t suggest putting more money than you need into your FSA in order to lower your tax bracket. That is simply wasting money. If you are looking to lower your tax bracket and are borderline, consider putting more into your 401K instead, but that is a different post for another time.
Another piece to keep in mind is that you can spend your FSA money before it is withdrawn from your paycheck, but if you change jobs or anything like that, you might owe the money you didn’t contribute yet back. However, if you have a surgery that costs $2000 on January 1st and you decided to set aside $2500 for the year, you can still use your FSA to pay for the January surgery when it bills, even though you haven’t contributed the full $2000 to your FSA yet. You will still have $500 remaining for any other medical expenses at any point in that year before you have to pay with post tax dollars.
Another thing about an FSA is that you and your spouse (if applicable) can both have an FSA and you can often split big medical expenses across the two. For example, for my PRK surgery, the cost is higher than the maximum each of us can put into our FSA accounts, but if you file your FSA claim with say LD’s FSA and then the remainder with my FSA, our accounts can cover the whole surgery pre-tax. When you are in, say, the 25% tax bracket, that savings on taxes could add up very quickly.
However, you don’t need to just focus on big medical expenses. Do you buy contacts every year? That could be covered by your FSA. Do you have medicines that you need to buy monthly? Once again, anything not covered by insurance (except over the counter meds) can be covered by your FSA. So, take a look at your consistent medical expenses and consider whether an FSA would be an advantage for you at the next enrollment time. Now is a good time to start keeping a running total of your medical expenses in a spreadsheet so that by the time next enrollment rolls around, you know exactly how much to contribute to your FSA.