The information in this article is up to date through tax year 2024 (taxes filed in 2025).
Many companies offer a flexible spending account, more commonly known as an FSA, which allows employees to set aside pre-tax dollars to cover eligible medical expenses. This means that contributions to an FSA can reduce your taxable income, potentially lowering your overall tax bill. However, while FSAs provide beneficial tax advantages, it’s important to be aware of the specific regulations and limitations associated with these accounts as you prepare to file your taxes.
What is a Flexible Spending Account (FSA)?
An FSA, or Flexible Spending Account, is a type of savings account that employers offer, allowing employees to set aside money from their paychecks for qualified expenses. The two most common types of FSAs are Healthcare FSAs and Dependent Care FSAs. These accounts enable you to use pre-tax dollars for specific expenses, which helps to reduce your taxable income.
Healthcare FSAs can cover eligible medical expenses for the account holder and their spouse, such as copayments, prescriptions, and medical equipment. Dependent Care FSAs can be used for eligible medical expenses and costs associated with caring for children, disabled or elderly family members. This may include things like elder daycare, preschool, and after-school programs.
For both Healthcare and Dependent Care FSAs, you must use the money for approved medical expenses not covered by your insurance plan. These expenses include copayments and health insurance deductibles, but do not include insurance premiums. Each type of FSA has different contribution limits and eligibility requirements.For either FSA option, things like prescription and over-the-counter medications, medical equipment like crutches, ambulance fees, and eyeglasses are covered. IRS Publication 502 outlines a full list of approved medical expenses that can be paid using an FSA.
FSA contribution limits
Employees are subject to a limit on the amount you can contribute to an FSA each year. The IRS allows employees who participate in an FSA to contribute up to $3,300 in payroll deductions for 2025 plans. If you’re married, your spouse can also contribute the max amount per year through their employer, allowing a for a household total of $6,600.
If you’re married and file a separate tax return from your spouse, the maximum contribution to your Dependent Care FSA is $2,500. If you’re married and file jointly, or you’re single and file as head of household, the limit is doubled to $5,000.
FSA tax benefits
Flexible Spending Accounts (FSAs) provide several valuable tax benefits. First, your contributions to an FSA are pre-tax dollars, which means they reduce your gross pay before taxes are calculated. For example, if you earn $50,000 and contribute $2,500 to your FSA, you’ll be taxed on only $47,500, potentially lowering your federal income tax liability.
Additionally, any withdrawals from your FSA used to pay for eligible medical or dependent care expenses are tax-free. If you use $1,000 from your FSA for out-of-pocket medical costs, you won’t owe any taxes on that amount, allowing you to stretch your budget further. FSA contributions are also exempt from Social Security tax and Medicare tax, which can result in significant savings, especially if you have high healthcare or dependent care expenses.
Are my FSA contributions tax deductible?
No, contributions made to a Flexible Spending Account (FSA) are not tax deductible. The IRS only allows you to deduct unreimbursed medical expenses if you are itemizing your deductions. This means that any medical expenses reimbursed by your FSA do not qualify for a deduction.
The good news is, since FSA contributions are made with pre-tax dollars, they are already tax-advantaged, meaning you do not pay taxes on those contributions.
Do I have to report my FSA on my taxes?
Since FSA contributions are made with pre-tax dollars, they are not subject to federal income tax, Social Security tax, or Medicare tax. Therefore, the IRS does not require you to report these contributions when filing your return. One of the main benefits of contributing to an FSA is that these contributions are not considered part of your taxable income.
Are there tax implications of closing my FSA?
If you decide to close your FSA, be aware that you might have to spend any remaining balance before the end of the plan year to avoid losing that money, as FSAs often operate on a “use-it-or-lose-it” basis. You should contact your FSA administrator to find out if there is a grace period. A grace period typically provides an additional 2.5 months to use your funds.
Should I get an FSA?
When deciding if you should participate in an employee-sponsored FSA, it is important to research and consider what will best fit your needs. If you’re relatively healthy and don’t have a lot of medical costs, contributing a smaller amount to your FSA may be the right route to take. It also might not make sense to have an FSA at all since funds can only be spent on certain medical activities. However, life is unexpected, and careful planning goes a long way.
Some FSA accounts must be spent before a certain date. Typically, any money in the account must be used in that calendar year, although some employers allow a 2.5-month grace period. After that, the account resets and any unused funds are lost. In some cases, employers allow a roll-over of unspent FSA funds from one year to another – but that is capped at $500, so you could lose any amount exceeding that. Before opting in to an FSA, be sure to ask if there is an expiration on the funds.
