Individuals would do anything to save money on taxes in these difficult economic times, which is why many people have resorted to the flexible spending account (FSA) for savings. The following is how FSA savings works: If a person saves $5,000 from his or her taxable wage to pay for braces, for example, and the combined federal income tax rate is 40%, the person saves $2,000. A restricted purpose FSA can only be issued to people who have a high deductible health plan with a medical savings account. Money in a flexible spending account (FSA) should be used during the plan year and before the two-and-a-half-month grace period. The money will be lost if it is not spent within this time frame.
The majority of consumers waste their FSA savings owing to a lack of understanding of the vast variety of qualifying costs covered by FSA. Most employees put away $1,500 on average in their FSA accounts, yet many of them lose $75 every year. Despite the loss of the $75, employees with FSAs are still much better off than those without one, saving an average of $300 to $525. Some workers have devised a novel, but legal, method of guaranteeing that their FSA is cleared at the end of the plan year. Employees spend the rest of their time tracking mileage. FSA providers allow account holders to accrue miles for visits to medical facilities, as well as excursions to Wal-Mart or CVS to purchase FSA-eligible products. The rates set by the Internal Revenue Service govern reimbursements for such travels (IRS). To be reimbursed for such excursions, an account holder must show a doctor’s bill or a pharmacy shop receipt, as well as proof of mileage, such as using Google Maps to calculate the distance from one’s house to the site of service.
Those who are concerned about losing their FSA balances might consider documenting their miles in order to reduce the amount. A trip to Wal-Mart or another shopping centre can be funded by an FSA account if a medication or other FSA qualified item is included on the shopping list. Doing so has been the norm in these difficult economic times. WageWorks, a prominent FSA provider, has made mileage reimbursement claims more convenient by releasing a mobile phone app that allows FSA account members to submit claims from their smartphones. In 2012, a $2,500 annual cap on how much an account user may put into their FSA will go into effect, requiring employees to carefully plan how they would use their FSA contributions.
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Another way is to pay your family members’ salary. If you’re a business owner, you might wish to give your family members salary if they’re in a lower tax rate than you. For example, suppose you earn $60,000 a year and have two children, ages 15 and 17, to support. Giving each child a $10,000 wage reduces your taxable income by $20,000. Everyone can earn up to $10,320 tax-free each year, so your children will not pay taxes and your taxable income will be considerably reduced.