by Venky

Created on: April 20, 2008

The United States is a great place to live. We've got foot-long hot dogs, demolition derbies, twenty-lane interstate highways, and more ways to gyp the government out of income taxes than I could ever write about. While I'm still young and haven't yet had the chance to experience the full range of tax credits, deductions, and incentives, there's one option currently available to me that's looking more and more appealing every day: the Flexible Spending Account (FSA).

For those people reading that are fresh out of the womb and don't know what an FSA is, here is a simple explanation. FSA is a magical land where you can send some of your before-tax paycheck dollars. Once in the magical land of FSA, that untaxed money can then be withdrawn to cover certain expenses. Sounds fantastic, right? Time to start shoveling every penny into FSA Land, right? Well, the government's not that dumb; there are some limitations that prevent you from using that money to buy, say, 100 Ferraris with untaxed income. For starters, FSA money can only be spent on two main categories of expenses: medical and dependent care.

Eligible medical expenses include things you might expectdoctor bills, copays, prescriptions, and many other common health care expenses that might not be covered by your insurancealong with a bunch of items that might not immediately occur to you are qualified medical expensesover-the-counter drugs, medical hypnosis, and weight loss programs to name a few. Eligible dependent care expenses are a bit harder to list, but they generally cover assorted costs associated with caring for a child younger than 13 or an elderly relative or disabled child of any age. Whereas health care spending accounts have a pretty well-defined list of qualifying expenses, dependent care FSAs seem to take more of a "not these items" approach.

The other big gotcha of Flexible Spending Accounts is their "use it or lose it" clause. Any money you put into FSA Land during a particular year must be used before the end of that year or else it disappears into another magical land: The Land of Ha Ha, Your Money's Gone and You Ain't Gettin' It Back. Starting in 2006, employers now have the option of extending the deadline to use FSA funds to the middle of March the following year.

Deciding whether or not to use an FSA and how much of your paycheck to set aside can either be really simple or somewhat difficult. If you know you're going to spend $5,000 a year on, say, your child's day care, just max out your

• 1
• 2
• 3
• 4
• Next Page >>