Flexible Spending Accounts -- Choose Wisely


Flexible Savings Agreements (FSA) will be set up by active employees soon for 2012. For clergy, this agreement is a part of the “Green Sheet.”

Two significant changes will take place through the Health Reform Act of 2010 beginning on Jan. 1, 2013:
  • The maximum amount that can an individual contribute to health FSAs will be reduced from $6,000 to $2,500, and
  • The threshold for itemized tax deductions for medical expenses will rise from 7.5 to 10 percent.
These changes could impact your decision for 2012 FSA plans. With the loss of tax savings, you may want to take full advantage of the 2012 limits and have any elective procedures you are considering to be done in 2012. Examples of elective procedures include, but are not limited to, LASIC eye surgery, major dental work (crowns, dentures, extractions, root canals, etc.), and purchase of new eye glasses. By doing so, you may save money in taxes.
For example, if an individual in the 25 perecent tax bracket incurs $6,000 in medical costs for both 2012 and 2013, the following is a breakdown of the increase in tax liability and medical expenses:
  2012 2013
FSA Contribution Limit $6,000 $2,500
Medical Costs not covered under FSA $0 $3,500
Tax Liability $0 $875
Notice, while in both scenarios, the person would have out of pocket expenses of $6,000, the person would have an additional tax liability of $875 in 2013 due to the $3,500 in medical expenses not covered under the FSA.
With the increased threshold for itemized tax deductions for medical expense, the individual in the example will not be able to itemize any of the medical expenses unless their gross income was less than $35,000 for the year.
If you are in a higher tax bracket, the impact on your tax liability will be even greater.
One final thought to consider. FSA contributions are always “use or lose it.” Unused portions of your FSA do not carry over. Therefore, overfunding a FSA plan is not wise as well. Investigate and calculate to take advantage of theses tax benefits.
With some careful planning, you will be able to utilize these tax benefits in 2012 and be prepared for the changes that are coming in 2013.