Don't Mess With Taxes

OK, I milked the "I've got a cold" excuse for as long as I could. And although you'll still hear a stray cough or sneeze around our house, they're probably attributable more to the seasonal cedar pollen than the seasonal head cold.

So I can't blame illness on why I'm so late in posting this week's Weekly Tax Tip, which just happens to be health related.

It's that time of the year. No, not to go holiday shopping, but to spend down your medical flexible savings accounts, or FSA. If your company's benefits year ends on Dec. 31 and you still have money in an FSA, you could soon lose it.

Sign in Austin optometrist office; photo by Kay Bell

That's one of the drawbacks of an FSA, although some employers provide account holders a three-month-plus grace period, until March 15, to use up the previous year's FSA balance. But it's an option, not the rule.

So check with your benefits' manager and FSA administrator to make sure you don't miss the deadline.

And if it's the end of the year, get spending that FSA money.

Counter-intuitive advice? That admonition, however valid it might be, also got me thinking about how these accounts, which can save you a few tax dollars because your contributions go in automatically before payroll tax amounts are deducted, could actually undercut good health and financial habits.

In fact, FSAs in many instances encourage medical over spending.

Let's face it, few of us calculate precisely enough to have the perfect amount of FSA money to pay for our medical expenses. And when we go looking for ways to spend it up so we don't lose it, we tend to overspend a bit.

Sure, the new pair of prescription reading glasses were a few more bucks than we had in our FSA account, but at least we wiped it out. Better I'm out $25, you rationalize, than lose $50 in my medical account.

But that's sort of the FSA equivalent of buying something because you have a coupon. You end up spending money you normally wouldn't or shouldn't spend.

Or to keep it in the tax realm, you justify a big expense now because when you file in a few months you'll get a tax deduction.

Ideally, with your FSA you'll find some items or treatments that fit the balance you have left.

Even more ideally, you did a better job of estimating your medical expenses when you chose an FSA amount for 2012.

The bottom line is that in all cases you need to look at the bigger financial and tax pictures, not just for the sometimes minimal tax break.

You also might find these items of interest:

• Over-the-counter meds no longer automatically FSA reimbursable
• Adding adult kids to health care, FSAs
• Breast pumps get IRS FSA OK