Prudent to ignore contributing to an FSA account if large expenses

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VirginiaBob

VirginiaBob

Member
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?
 
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.
 
ILoveTDs said:
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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Also, if I remember how this works correctly you don't pay Social Security tax on the $ 5,000 FSA amount.
 
Scout333 said:
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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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.
 
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ILoveTDs said:
If forced to use it, you could purchase medical equipment and then make a charitable donation (deduction)
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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.
 
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