You may be able to eke out more tax savings in 2023.
- Flexible spending accounts let you set aside pre-tax dollars for healthcare expenses.
- In 2023, the contribution limit for these accounts is going up.
- The new limit for FSAs will be $3,050 starting next year.
Healthcare is one of those expenses that can be unavoidable — and costly. In fact, a big reason a lot of people land in debt is that their healthcare expenses come in higher than anticipated, and they don’t have enough money in savings to cover them.
If you tend to spend a lot of money on healthcare, then it could pay to fund a flexible spending account, or FSA. The upside of putting money into an FSA is getting a tax break on your contribution. Put $1,000 into one of these plans, and that’s $1,000 the IRS won’t tax you on.
Right now, FSA contributions max out at $2,850. But in 2023, the limit for FSAs is increasing to $3,050. And that’s something you may want to take advantage of.
Should you max out your FSA?
There’s a benefit to funding an FSA aside from the tax savings. The money you put into your FSA will be deducted from your pay automatically, the same way contributions to a 401(k) plan are subject to automatic deductions. That means you won’t really have to think about saving money for healthcare because your employer will be making that happen behind the scenes (assuming you sign up for an FSA). And that way, if you incur medical expenses, you’ll have a pool of money to tap to pay for them.
That said, there’s a downside to putting money into an FSA. These plans commonly require you to use up your balance by the end of your plan year or otherwise risk forfeiting it. Now you may, depending on your plan, have the option to carry a small portion of your FSA over into the new year, or get a few extra months in the new year to use up your funds.
But generally speaking, if you’re going to max out an FSA for 2023, you should only do so if you think you’ll incur $3,050 in medical costs. If you’re not sure, you may want to contribute less.
Without a crystal ball, you may have a hard time determining how much money you’ll end up spending on healthcare in 2023. But a good bet in that regard is to look at your bank account and credit card statements from the past year to see what your health-related spending amounted to. You can use that as a guideline to determine how much to contribute to your 2023 FSA.
At the same time, think about some of the new expenses you might incur in 2023. Maybe your child has been squinting and there’s reason to think they might need glasses. Or maybe another child of yours is expected to get braces next year. Those would be reasons to potentially increase your FSA contribution from what you set aside in 2022.
A bigger opportunity to save
Some people spend a lot more on healthcare than what FSAs allow for. If that’s the case, then the fact that next year’s limit is up is a good thing. It means you can enjoy a bigger tax break for expenses you have no choice but to bear.
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