If you use the flexible spending account, you pay for eligible expenses with pre-tax dollars, which means you contribute before federal income taxes and Social Security, or FICA, taxes are withheld. As a result, your taxable income will be reduced so your taxes will be less.
The following example shows how using the health care flexible spending account can reduce taxes and increase take home pay. Note: The federal child tax credit allows taxpayers to reduce their taxes by $1,000 for each qualifying child under age 17.
Assume you're married, have a joint income of $58,000 per year with one dependent child and contribute $5,000 to the flexible spending account.
In this example, you would have an additional $1,126 in annual take-home pay because you used the flexible spending account.
| With Account |
Without Account | |
|---|---|---|
| Gross income | $58,000 | $58,000 |
| Annual FSA contributions | - 5,000 | - 0 |
| W-2 income | 53,000 | 58,000 |
| Standard deduction | - 10,900 | - 10,900 |
| Personal exemptions ($3500 x 3) | - 10,500 | - 10,500 |
| Taxable income | 31,600 | 36,600 |
| Income tax (after $1000 child tax credit) | 3,941 | 4,684 |
| FICA tax on W-2 income | + 2,417 | + 2,800 |
| Total federal taxes | 6,358 | 7,484 |
| After-tax income | 25,242 | 29,116 |
| After-tax health care expenses | - 0 | - 5,000 |
| Spendable income | 25,242 | 24,116 |
| Savings with FSA | $1,126 |