If your employer offers a flexible spending account (FSA) as an optional employee benefit, it’s a tax-saving opportunity you probably don’t want to pass up. An FSA lets you set aside pretax income to pay for uncovered healthcare expenses, including copays, deductibles, prescription drugs, and many over-the-counter medications that meet the IRS standards for treating or preventing disease or illness.
An FSA usually works on a calendar year. To participate you contribute, through payroll deductions, as much as you think you’ll spend during the year, up to the maximum of $2,650. If you and your spouse are both eligible to participate, each of you can contribute up the $2,650 limit.
There is one risk: If you don’t use the money during the year for eligible expenses you may forfeit it. However, employers may offer either a two-and-a-half month grace period into the following year or allow you to access up to $500 of any unspent money in that year, removing some of the pressure of using up your balance.
Using an FSA does involve substantial paperwork, but it can provide real tax savings. For example, suppose you contributed the full $2,650 and spent it all on covered expenses. If you were in the 33% tax bracket, you would effectively have saved $874. In the 25% bracket, the saving would be $662. If you want more information, check IRS Publication 502, “Medical and Dental Expenses.”
You are entitled to deduct gifts you make to qualified charitable, religious, and educational organizations. The way you make the gift can have tax consequences. For example, you’re likely to save on taxes by giving assets you own directly to the organization you want to benefit rather than selling the assets and making a cash gift.
The tax consequences of bequests you make to individuals, such as those to children and grandchildren, can be reduced as well by making those gifts in certain ways. Among the examples are creating trusts and avoiding the generation-skipping tax. Working with experienced legal and tax advisers as you make your plans is always wise and sometimes essential.
If you sell an investment that has lost value to offset your capital gains but have plans to buy it back because you think it has future promise, you need to be careful to avoid the wash sale rule. In brief, the rule says that a potential offset is disallowed if a substantially identical investment is sold and then repurchased, or purchased and then sold, within 30 days.