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2015 Tax Tip: How to Use Your Flexible Spending Accounts

Money paid into Flexible Spending Accounts for health expenses and childcare won't be hit by federal income tax or Social Security tax.
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ByRICHARD DAVIES and ANDREW EVANS
March 06, 2015, 8:38 AM

— -- Americans are reaping the benefits of having access to flexible spending accounts through their employer.

"They're fabulous deals, because with a FSA for either health care or childcare, those are the two kinds of expenses you can run through them. The money put into those accounts goes in pre-taxed and it not only avoids federal income tax, but it also avoids federal Social Security tax,” says Kevin McCormally of Kiplinger’s Personal Finance magazine.

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McCormally says one drawback is they're use-it-or-lose-it accounts, meaning you either spend all the tax-free money you set aside from your salary over the course of the year, or you miss out, though some companies offer a grace period.

Even if they don't, McCormally says, you'll likely still come out on top.

"Most people could actually forfeit 20 to 40 percent of what they put in and still come out ahead, because the tax breaks are so strong,” he says.

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