Tax-break relief for tax-induced headaches

Is your head pounding from trying to fill out all those IRS forms? Then get over to your corner drugstore for some aspirin. It might even save you some tax dollars.

If you have a flexible spending account at work, you can pay for that bottle -- or bottles, depending upon how complicated your tax situation is -- of pain killers with FSA money.

That's the beauty of an FSA. It helps reduce both your tax bill and your out-of-pocket medical expenses.

With these company-provided accounts, you put money into them before your withholding taxes are computed. That means a lower wage base upon which you owe Uncle Sam. Then when you have to fork over medical co-pays or deductibles, you can be reimbursed for those expenses with FSA funds.

The plans have one big downside, though. You have to spend your FSA money by a cut-off date or you lose it. Typically, this is the end of your company's benefit year, or Dec. 31 for most folks.

That drawback was eased a bit a couple of years ago when the IRS rewrote FSA regulations. Now companies can offer employees an extension of up to 2½ months to use FSA funds.

In today's Wall Street Journal, Tom Herman reports (sorry, subscription required) that most large employers now offer this grace period, which has in most instances a cut-off date of March 15.

And if your company is giving you extra time to spend your FSA money, you might be able to zero it out here in the next few weeks without making a single doctor's appointment.

As noted up top, you can use FSA money to pay for over-the-counter medications. A lot of pharmacies now annotate their cash register receipts to indicate which purchases meet FSA OTC rules.

Online drugstores also have gotten into the act. Drugstore.com, for example, even has its own FSA store featuring tax-approved items. And you can check out this story for additional ways to spend up your medical account.

FSA only: Remember, though, that the OTC rule is an FSA-specific allowance.

If you don't have a workplace spending account or you've used it up and want to count additional out-of-pocket medical expenses as an itemized deduction, don't add up your Walgreen's receipts. You cannot count OTC drug costs as part of your Schedule A medical deductions.

And definitely don't think of trying to claim any FSA reimbursed expenses in your itemized medical list. An IRS examiner will definitely slap down any attempted tax-break double dipping.

But there are plenty of other ways to meet the 7.5 percent of adjusted gross income threshold to deduct medical costs. This story has some suggestions.

Comments

[deepak taxes relief]

While computing the annual income tax, taxpayers can offset the amount of tax relief granted against the income tax that they owe to the government. Similar to personal tax allowance, tax relief for employees is offered throughout the year. Tax relief is normally placed under various categories as tax relief for employees, self-employed people, training and educational institutions, property, medical and insurance premiums, and payments to charitable institutions.

[mapgirl]

Great post Kay! It doesn't apply to me, especially because I am good about using up my FSA, but it's good to know!

[Finance Guide 101]

Nice helpful post Kay Bell!

[mbhunter]

Heh -- good advice. We'll probably eat through our FSA easily this year but there were times that I could take all the help I could get in using that allotment up!

[Kyle]

FYI - Dont Say Sorry! You can get free access to WSJ.com with a netpass from: http://news.congoo.com

Andrew Tobias blogged about this last week..I thought it was a great tip!