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Bankrate's 2009 Tax Guide
Take advantage of benefits at work and you may find your job even more rewarding at tax time.
Flexible spending accounts
Flexible spending accounts can lower tax bills
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The pretax account money can be used to help pay the costs of any caregiver providing services while you're at work. This includes the nursery school for kids, a day camp during the summer or the home health aide looking after a disabled spouse.

"Employees are always telling us $5,000 is a joke," says Linda Wurzelbacher, president of B.A.S.I.C. Western USA, an employee benefits administration firm in Tucson, Ariz. "It's not an amount that kept up with the times. Anybody with kids will tell you that they easily exceed this amount in day care in a year."

Scharin agrees that dependent-care FSAs tend to get more fully utilized.

"I suppose the IRS emphasized the medical side because that's where people are more likely to have dollars left at the end of the year," he says. "I figure that people who use the dependent care benefit have probably already used up all of the funds in that account by the year's end."

But if you have $200 sitting in a medical spending account at the end of your benefit year, you could prevent that money from going to waste. If you pay for medical treatment from your own pocket within the two-and-a-half months after your use-it-or-lose-it deadline, you can use that FSA money to cover the costs.

Coordinating across benefit years
Besides providing more time for running up bills, this change also allows employees to coordinate two years' FSA contributions for maximum benefit, says Scharin.

For instance, suppose you have $200 left in your health care FSA as the year's end approaches. You plan to purchase new eyeglasses that cost $300. Under the old rules, Scharin points out, you would purchase the glasses in December, be reimbursed the $200 in your FSA and pay the $100 balance with your after-tax dollars.

Thanks to the carryover rule, Scharin says you can wait until January to purchase your spectacles and pay the full $300 cost with pretax FSA dollars. The first $200 of the bill would come from last year's unused $200; the remaining $100 would come from the new year's FSA contributions.

If you annually put $1,000 in your spending account, this then would give you a $300 pair of new glasses, paid for with pretax dollars and leave $900 in your FSA for the rest of the year.

Not so fast
But there is a catch.

"An employee is eligible for this extension only if his or her employer amends its FSA document to permit this grace period," Scharin says.

Employees of companies that make the extended FSA change certainly will welcome the added time to spend leftover money. Medical personnel, no doubt, also will greet such extensions warmly since it will give them more time during the traditional year-end holiday season. Previously, the end-of-year treatment requirement prompted a mad December dash to doctors, optometrists and dentists, where the insistent refrain of patients declaring, "It's got to be done this month," was almost as common as the christmas song playing on the waiting-room Muzak.

Companies, however, might not be as sanguine because the change could mean costly changes associated with extra administration costs and employee notification and education efforts.

-- Updated: March 26, 2009
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