Spending accounts reduce your taxes by reducing your taxable income. Using these pre-tax accounts can make a significant difference in your take-home pay.
The chart below illustrates what would happen if your annual pay is $45,000 and you have to pay $2,000 in health or dependent care expenses not covered by any other benefit plan.
|Example||After-tax (without account)||Pre-tax (with account)|
|Annual pay|| |
|Pre-tax contribution used for expenses|| |
|Standard Deduction|| |
|Federal income taxes*|| |
|Social Security taxes|| |
|After-tax payment for expenses|| |
|Take-home pay|| |
Total tax savings from using pre-tax dollars is $453.
*Based on 2008 tax laws. Assumes you are married, file jointly with your spouse, take the standard deductions and four exemptions.
Below is a partial list of many of the medical expenses and items purchased for your personal well-being that are not eligible for payment under a spending account. Any medication used to promote general health such as vitamins and herbal remedies are not eligible as well.
- Cosmetic surgery or procedures of any kind
- Health club memberships
- Supplements prescribed by an alternative provider - e.g., naturopath or acupuncturist
- Over-the-counter vitamins
- Over-the-counter medications submitted without a doctor's written prescription (effective January 1, 2011)
- Dietary supplements
- Herbal remedies
Please refer to the IRS publication 502, "Medical and Dental Expenses" or Section 213d of the Internal Revenue Code as a guide to covered expenses.