Tax breaks: Bait and switch

A flexible spending account cuts taxes

A medical flexible spending account, or FSA, is a welcome workplace benefit for many. You make contributions to the account before taxes are calculated, and then you use that tax-free money to pay for uncovered medical expenses.

But an FSA is not for everyone.

It can reduce the amount of taxes taken from your paycheck, but for some workers, those tax savings are negligible.

Your FSA contribution level is limited. For 2012, employers were allowed to set the amount; a $5,000 maximum is typical. But beginning in 2013, FSA contributions will be limited to $2,500 with annual inflation increases.

FSA reimbursement rules also have been tightened. You now need a doctor’s prescription to use FSA funds for over-the-counter medications.

And the biggest drawback is that if you don’t use all your FSA money in your benefits year, or by March 15 if your company provides you with a grace period, you’ll lose any money left in the account.

So evaluate your financial and medical needs before you sign up for an FSA. It might not be as tax-beneficial for you as you thought.