Have you heard of the FSA?
A Flexible Spending Account (FSA) is a tax-reducing program offered by many employers that allows you to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars. Since you are using pre-tax dollars to pay for certain health care and dependent care expenses, you get an immediate discount on these expenses that equals the taxes you would otherwise pay on that money. Does that make sense? Here is an example of the health care portion.
If you are in a 25% tax bracket, you will save 25% on all eligible expenses, because the money you set aside in the FSA is not taxed. So if you elect to save $1000 in the account for the year, and you use all of that to pay for the things that you are already going to pay for, such as dentist visits, doctors visits, co-pays, and even over the counter drugs; you will save $250.
So with a FSA, you can both reduce your taxes and get more for your money by saving from 20% up to 40% for things you would normally pay for out-of-pocket health care and dependent care expenses with after-tax (as opposed to taxed) dollars.
Check with your employer about this plan, and if you can participate, just do it! Set aside a modest amount the first year and see how it works. The rules where I work are such that any you set aside and don’t use, you lose, so you need to spend all of what you designate for the year.
Get the list of everything that is eligible, and review it good. You will find that many many things are eligible, such as Motrin and cough syrup. This is a good tax saving vehicle. Be sure to take advantage of it if you can. The Federal Government Program web page gives a lot of good info on this, but your own employer will have a different link for you. This is a good example of how it all works.
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