Tax free income
A surprising number of feds don’t know about FSAFEDS, the flexible spending accounts administered by the Office of Personnel Management (OPM). These accounts let you pay for health and child care with before tax dollars, resulting in savings of 20-40% over after tax dollars, yielding savings of up to $4000 per year depending your tax rate. There are two kinds of accounts most people use:
1. The Dependent Care FSA. With this FSA you can set up biweekly payroll deductions totalling up to $5000 per year. You can use this money to pay for summer camp, daycare, after school care, etc. for children under age 13 or for other people completely dependent on you. This account pays out as the money comes in from your payroll check — you can’t get the money in advance. However, you can submit claims that total over the current amount in your account and the plan will deposit the money into your bank account as soon as it comes in.
2. The Health Care FSA. This FSA can also be set up as a biweekly payroll deduction totalling up to $5000 per year. Unlike the Dependent Care FSA, the account can pay out the full amount before it is deducted from your paycheck, so if you have a $5000 medical expense on Jan. 1, the full $5000 will be paid out if that is the yearly amount you opted for. You can use this account to pay for medical and dental costs and for prescription and over the counter medicines.
The one drawback for both of these accounts is that you have to estimate how much you want to deduct from the account in the beginning of the year. Any funds you don’t spend in the year are forfeited and you can’t roll the money over into the coming year. An easy way to estimate how much to put in these accounts is to total up your dependent and health expenses for the previous year. It’s easy to underestimate this amount as costs are always going up, so don’t worry to much about guessing too high.
Note that if you use the Dependent Care FSA you can’t take the Dependent Care credit on your federal tax form — however, it usually works out the the FSA is the better deal. Also, the $5000 yearly limit for both FSA account types is per family, not per person working.
