As the year-end holidays approach, it may be time to empty out your health flexible spending account (FSA). Here's an overview of the tax rules for these accounts.
- The tax savings. If your employer offers a health FSA as a fringe benefit, you can fund your account through pre-tax contributions. That means you save on both income and payroll taxes. Withdrawals made during the course of the year are exempt from tax as long as the money is used to pay for qualified expenses.
- Contributions. Annual contributions to your health FSA are limited. The limit for 2016 is $2,550. For 2017, the limit will be $2,600.
- Qualified expenses. The list of qualified expenses ranges from prescription drugs to wheelchairs and generally mirrors those that would be deductible as itemized medical costs on your personal federal income tax return.
- Why you might need to empty your account. Under the basic "use it or lose it rule," funds remaining in your account at year-end are forfeited. To avoid that outcome, you might want to schedule routine doctor and dentist visits, such as a medical exam or dental cleaning, in December. However, your employer can extend the deadline by authorizing a grace period of up to 2½ months after the close of the year. Alternatively, your employer could allow you to carry over up to $500 to 2017.
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