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Thread: Prudent to ignore contributing to an FSA account if large expenses

  1. #1

    Default Prudent to ignore contributing to an FSA account if large expenses

    Let's say I make $100K (adjusted gross) next year. If my planned medical expenses are greater than $12,500, does the FSA offer very little tax advantage? Note that the IRS currently allows you to deduct all medical expenses greater than 7.5% of your AGI.

    Consider the 2 examples below:

    Example 1:
    100K AGI
    No FSA
    Medical Expenses $12,500
    7.5% of AGI is $7,500
    Tax deductible portion is $5,000.

    Example 2:
    100K AGI
    Medical Expenses $12,500
    Utilizing FSA $5,000 contribution reduces AGI to $95K
    7.5% of AGI is $7,125
    $12,500 - $5000 (FSA) = $7,500.
    Additional deduction over example 1 = $375.

    Is this correct?
    Current signal = BUY and HOLD


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  3. #2

    Default Re: Prudent to ignore contributing to an FSA account if large expenses

    Correct.

    Example 1 would have a $5,000 Itemized deduction, if you itemize your 1040 or 1040A.

    Example 2 would have a $5,000 adjustment to AGI (i.e. deduction whether you itemize or not) and an additional $375 itemized deduction, if you itemize on your 1040 or 1040A; for a total of $5,375.

    As a result, you are better off with example two in this example. You will always be better off with an adjustment to your AGI (FSA) as oppose to a itemized deduction because, (1) not everyone itemizes, and (2) additional above the adjustment to AGI can still be itemized.

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  5. #3

    Default Re: Prudent to ignore contributing to an FSA account if large expenses

    Quote Originally Posted by ILoveTDs View Post
    Correct.

    Example 1 would have a $5,000 Itemized deduction, if you itemize your 1040 or 1040A.

    Example 2 would have a $5,000 adjustment to AGI (i.e. deduction whether you itemize or not) and an additional $375 itemized deduction, if you itemize on your 1040 or 1040A; for a total of $5,375.

    As a result, you are better off with example two in this example. You will always be better off with an adjustment to your AGI (FSA) as oppose to a itemized deduction because, (1) not everyone itemizes, and (2) additional above the adjustment to AGI can still be itemized.
    Also, if I remember how this works correctly you don't pay Social Security tax on the $ 5,000 FSA amount.

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  7. #4

    Default Re: Prudent to ignore contributing to an FSA account if large expenses

    Quote Originally Posted by Scout333 View Post
    Also, if I remember how this works correctly you don't pay Social Security tax on the $ 5,000 FSA amount.
    Good point on the social security - I think you are correct. Social Security plus Medicaire would be a 6.2% (or 4.2?) + 1.45% savings ($382.5 on $5000). So total advantage of $382.50 + whatever the $375 tax deduction works out to. So around $500-$600 savings to use the FSA.

    Still not sure which way I'll go since the risk is that I won't need the medical services at all, but it is interesting to consider and to realize all the facts.

    One idea is that I might do the FSA anyways and if I don't need the medical services, I'll just do something I wasn't planning, such as corrective laser eye surgery or something.
    Last edited by VirginiaBob; 11-29-2011 at 11:18 AM.
    Current signal = BUY and HOLD

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  9. #5

    Default Re: Prudent to ignore contributing to an FSA account if large expenses

    If forced to use it, you could purchase medical equipment and then make a charitable donation (deduction)

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  11. #6

    Default Re: Prudent to ignore contributing to an FSA account if large expenses

    Quote Originally Posted by ILoveTDs View Post
    If forced to use it, you could purchase medical equipment and then make a charitable donation (deduction)
    I wish. Unfortunately, the FSA accounts rules aren't as liberal as they used to be. Now anything you buy has to have a prescription from your doctor. One thing that I thought about trying though was to get my doctor to tell me I need exercise, and then I'll hit him up for a note for a treadmill.
    Current signal = BUY and HOLD

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