With medical expenses deductible on income tax returns only to the extent they exceed 7.5 percent of adjusted gross income, relatively few people are ever able to qualify for the itemized medical deduction. FSAs have an added benefit under the Taxpayer Relief Act of 1997. That's because many of the new law benefits including the new tax breaks for families and college expenses, and the new Roth IRAs are phased out for taxpayers with incomes above certain levels. So if you expect to be bordering on the income-eligibility limits, earmarking salary to an FSA may help you reduce your income enough to make you partly or fully eligible for the tax benefits. But Cautiously If you receive an application form for an FSA, don't set it aside for long.
Employers open enrollment for FSAs only once a year.
Once the FSA enrollment applications are sent out, employees usually have only a few weeks to sign up. During the year, you'll be able to withdraw funds from your FSA to pay eligible child-care or medical bills. Think carefully about how much you designate on your application form because you won't be able to change your mind later. You aren't allowed to adjust the amount or drop out of the plan during the year unless you have some change in family status, such as a divorce. Before you decide how much to contribute to an FSA, make a careful estimate of what your child-care and medical expenses are likely to be.