Medical flexible spending accounts (FSA) function much in the same way dependent care flexible spending accounts do. Assuming your employer offers medical FSAs, you can deposit money on a pre-tax basis into the account. This reduces your taxable income potentially saving you hundreds of dollars in income tax. A medical FSA can be an excellent tax planning tool. Medical FSAs are a little more flexible than dependent care FSAs. If you are slated to deposit $3,000 for the year into a medical FSA, you can make claims against the full $3,000 from day one of the calendar year. Not so with the dependent care FSA in which you can only make claims up to the amount deposited in the account through the claim date. But beware! Both dependent care and medical FSAs are “use it or lose it” accounts. If you don't incur and submit claims for qualified expenses by a certain deadline, you lose your money. For more information on what the IRS considers a qualified medical expense and applicable deadlines, read IRS Publication 502. If you have a lot of medical expenses, you may be better of itemizing on your income tax return if you think your expenses will exceed 7.5% of your adjusted gross income. For tax advice and planning help, consult a financial planner or tax professional.
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