You can use a Flexible Spending Account to set aside tax-free money through payroll deductions to pay qualified health and dependent care expenses. Because you don’t pay taxes on the money you contribute, more money is available to you as disposable income.
Your annual contribution is deducted evenly from your paychecks throughout the year. FSA funds are use or lose— any money remaining in your account after the deadline for the plan year’s claims (March 15 of the following year to incur expenses and April 30 to file claims), is forfeited. Your FSA funds do not roll over year to year. You must spend it in the calendar year that you contribute.
There are two types of FSAs to consider:
Health Care FSA
The Health Care FSA pays for eligible out-of-pocket medical, prescription, dental and vision expenses, such as health insurance deductibles, copays for prescription drugs and doctor’s visits, prescription eye wear and supplies, dental/orthodontia expenses and hearing aids. The maximum amount that you can contribute each year is $2,650 as an individual, or $5,300 if married and filing joint tax returns.
Dependent Care FSA
The Dependent Care FSA allows you to set aside pre-tax funds for dependent care expenses (typically child care or day care expenses). Expenses can be claimed only for dependents under age 13, elderly dependents or dependents of any age if they qualify as disabled.
The maximum amount that you can contribute each year is $5,000 (or $2,500 if you’re married and filing separate tax returns).
If you’re married, your spouse must be working, looking for work, or be a full-time student for you to be eligible to set aside pre-tax dollars in a Dependent Care FSA.