When it comes to end-of-year tax planning, most people focus on the deductions and credits that could put them in a better position and allow them to reduce their taxable income or secure larger refunds. However, it's also important to review tax-advantaged health accounts to ensure the benefits have been maximized and that funds won't be squandered by the end of the year.
For example, MarketWatch recently listed health savings accounts and flexible spending accounts as two of the most overlooked and often ignored benefits that are allowed to go to waste by employees. Although HSA balances can be carried over at the end of the year, many individuals fail to use the funds to cover qualifying out-of-pocket expenses, review their savings at the end of the year or contribute the maximum to these accounts. HSAs have emerged recently as a smart savings tool for retirement. Because the balances can be carried over year after year, many people are choosing to accrue money in these funds over decades of working, and use the money when they enter their retirement years and their medical costs begin to rise. For this reason, those who anticipate future health issues might benefit from maxing out HSAs each year, if possible.
FSA balances often forfeited
Unlike savings accounts, FSA balances that remain at the end of the plan year are forfeited to the employer. The Internal Revenue Service recently modified this "use it or lose it" rule, and now allows individuals to carry over up to $500 in unused funds to the following plan year. However, employers are not required to follow this new guideline, so individuals should find out if their company will implement the new allowance and enable them to carry over funds. If not - or if workers still have a balance higher than $500 at the end of the plan year - it's important to use the funds for qualifying expenses to avoid losing them.
For instance, qualifying expenses can include eye glasses and contacts, dental care, prescription medications, hospital fees, health equipment and insurance deductibles. A tax preparer can also provide a more detailed list of allowable expenses. Therefore, those putting off a trip to the dentist or eye doctor may benefit from going before the year ends to use up some of their funds. Additionally, it may be a good time to assess expected future expenses, which could affect how much individuals want to contribute to their accounts next year. Those who rarely utilize their flexible spending and frequently forfeit funds might think twice about maxing out contributions.