FSAs and tax season

“But wait… I thought FSAs were tax-free?”
We get it. The last thing you want to do when enjoying your tax-free spending is consider how the IRS might get involved. But rest assured -- those tax-free dollars are there to help you and your family, and that’s not expected to change.
But this doesn’t mean you shouldn’t be prepared.

First a quick overview…

With either a dependent care FSA for child-related expenses, like daycare, or a health care FSA for standard medical expenses, money is deducted from your salary each paycheck. These funds go into an account on a tax-free basis, which reduces your taxable income and saves you money over time. In some cases your employer may also contribute money to your FSA, which is tax-free to you. Win-win, right?
Keep in mind, an FSA isn’t a savings account. Leaving money in your FSA doesn’t accrue interest, nor is there any real benefit for holding onto it. Plus, if you still have money in your account when your FSA deadline hits, it goes kaput.
Let’s dive in…

Section 1:What do I need to prepare?

Let’s set your mind at ease right from the outset — filing taxes with an FSA is a breeze. But the key thing to remember is that these tax-free accounts ultimately belong to your employer and you can’t take the money with you, so it’s important to be mindful of the money available, and how you plan to spend it over the coming year.
Currently, you can allocate up to $2,700 per year in an FSA. If the FSA runs on a calendar year basis, you typically have a deadline of December 31 to use your funds. If an employer gives you the option of utilizing the grace period, this is extended to March 15.
Keep in mind, grace periods aren’t required to be offered so check with your employer to find out if you even have one. You may have another option of rolling over up to $500 at year end, or neither.

Section 2:How do I itemize my FSA expenses on tax returns?

As strange as it sounds, a line from a classic “Seinfeld” episode can explain FSA itemization: “Don’t double dip!”

When doing your taxes, FSA owners can itemize whatever they want, except for FSA expenses.
This money has already been removed from the equation, and trying to get a further tax break on the funds is considered “double dipping.”
(It’s also easily recognized and highly frowned upon by our friends at the IRS, so be organized when it comes time to file!)
Note: Unlike HSAs, which must be reported on your Form 1040, there are no reporting requirements for FSAs on your income tax return.
Bigger Note: If you have any unused amounts in your FSA (after grace periods run out or in excess of any rollover you may be allowed), that amount is forfeited due to the “use-it-or-lose-it” rule. This, you might already know. But you can’t claim these unused funds as a loss on your tax return - your arrangement already counts as a deduction.
Like we mentioned at the beginning of this guide, no one wants to think about the Tax Man when using their FSA dollars. But we’ve learned it’s always better to be ready, in case your individual tax situation requires a little more attention. With proper record keeping and account management, your FSA can be a tax-free source of relief come mid-April.