Another way to save tax money is by having a flexible spending account. Under these voluntary, employer-sponsored plans, you agree to have pretax money withheld from your paychecks. When you incur a qualified expense such as medical care, dependent care or transportation, you get your money back. Although they may sound a little complicated at first, these are well worth the trouble.
Deanna Smith, benefits specialist at Grey Healthcare Group in New York, says, "A lot of people don't understand the benefits of pretax, especially if this is their first job. In my new-employee orientation, I show an example of how a flex plan works, and I say, 'See, this way you have more money.' Then they say, 'Oh, more money!' And then they get it."
"Not nearly enough people sign up for flex plans," benefits administration CEO Farley says. People worry about the use-it-or-lose-it rule, he says. In flexible spending accounts, any money you put into a flex plan and don't use within the specified time period is forfeited. Still, the tax savings are so advantageous that you usually come out ahead even if you fail to use some of your funds.
"It's a no-cost benefit," says Farley.