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Tax Deduction Limits
Medical FSA Beats Tax Deduction Limits
Medical tax deduction limits and use of a flexible spending account are important topics that growing families need to know. Many growing families often must cope with a variety of qualified un-reimbursed medical expenses that might allow them to save money on taxes. The key to unlocking maximum tax savings is understanding the advantages of a Flexible Spending Account (FSA), the limitations of deducting medical expenses using Schedule A, and using both tax vehicles in an appropriate manner.
Use Schedule A medical deductions for unexpected medical expenses. Schedule A deductions don’t begin until they exceed 7.5% of Adjusted Gross Income (AGI), provide smaller overall savings, and have high-end income limits as well.
Use your FSA for as many predictable expenses as possible. An FSA provides first dollar tax savings, larger savings overall, and helps you avoid deduction limits associated with Schedule A. These topics are explored in more detail below.
Predictable Costs of Infertility Treatments Many growing families are faced with qualified un-reimbursed medical expenses associated with infertility treatments. Many procedures are not covered by insurance. But these expenses are often planned in advance, making an FSA an ideal vehicle to help families keep more of their money be beating the deduction limits imposed by the IRS.
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Schedule A Medical Tax Deduction Limits
Schedule A limits deductions in when your expenses are too low. Contributing money for predictable expenses to your FSA helps beat these IRS limits in three different ways, which are explained in greater detail below.
The IRS limits your qualified medical and dental expense deductions to those over 7.5% of your Adjusted Gross Income (AGI) - when your expenses are too low. The recently enacted Patient Protection and Affordable Care Act will raise the floor to 10% beginning in 2014 as a means to generate extra revenues to pay for the bill.
For now, a couple with an AGI of $100,000 gets no tax savings on the first $7,500 of medical deductions. By using an FSA to pay for the predictable portion of expenses you can lower your taxes three ways:
- First dollar tax savings - there is no AGI floor with an FSA
- Lower your AGI - An FSA takes money from your check pre tax which lowers your reported income; your deduction floor will be lower, and other tax breaks key off of AGI and pre tax deductions
- Avoid other taxes - Lower reportable income means lower FICA taxes
Predictable and Unexpected Deductions
While using your FSA has many advantages there is one drawback that is crucial to understand, and explains why you should only use predictable expenses. Any money you contribute to your FSA will be lost if not spent within 12 months. You must have qualifying medical expenses to get your money back from the account. Many employers choose to provide a three month grace period, but you still must incur these costs to get your money back.
