Time running out to tap FSA accounts

Few things are worse than being sick over the holidays. With Austin's literally hot and cold weather, a lot of my friends have the sniffles. I'm sure thing are much worse for folks dealing with really bad winter conditions.

That means in addition to tending to last-minute gifts, all these under-the-weather shoppers also are popping into the local drug store to pick up some cold, allergy and/or sinus medications.

The good news for my ailing friends, readers, and the family and friends they'll be visiting, is that most of the over-the-counter treatments do a decent job of relieving symptoms. The better news is that folks with medical flexible spending accounts is that they can use that account cash to pay for their Sudafed, Nyquil and similar products.

Tax and treatment savings: The beauty of an FSA is that it helps reduce both your tax bill and your out-of-pocket medical expenses.

Your contributions go into the FSA before your withholding taxes are computed. That gives you a lower wage base upon which you owe Uncle Sam. Then when you have to fork over medical co-pays, deductibles or treatment costs, you're reimbursed the money you would have spent anyway from your tax-saving FSA funds.

The one major downside of an FSA, however, is its use it or lose it feature. Any cash left in the account at the end of the benefit year goes to your employer.

Companies do have the option to give workers 2½ months, or until March 15 for calendar year benefit plans, to spend the money, but that's optional. Check with your company and if it doesn't give you the extra time, you have just a few days left to make FSA eligible purchases.

The obvious purchases are the medications we've already talked about. But you can get a bit creative. Consider a first-aid kit, which could come in handy if you run into trouble putting together one of the kid's toys, or a blood pressure cuff to help you document just how stressful your holidays might be!

FSA lost money misconceptions: Some folks think that giving back their FSA money will cost them extra at tax time. Not true.

You won't owe tax on the relinquished money. You never got it, so it's just gone, of no use to you or the tax collector.

In that same vein, neither can you claim it as a loss as one creative taxpayer suggested in an exchange with my tax-blogging colleague Robert D Flach, The Wandering Tax Pro.

"You cannot claim a 'loss' or miscellaneous itemized deduction for unused, or forfeited, FSA monies," says Flach. "If you contributed $5,000 of your wages to the FSA then your 'take home pay' and your federal taxable wages (and possibly state taxable wages) are reduced by $5,000. If your gross wages are $100,000 the W-2 will show $95,000. If you only submitted $4,000 in expenses then you have indeed suffered an economic loss of $1,000 – but it is income that was not taxed."

FSA spending suggestions: So that you don't have to worry about forfeited FSA funds, spend down your account by Dec. 31.

FSA plans generally allow you to be reimbursed for medical expenses that the IRS says are deductible. A list of such items and procedures starts on page 5 of IRS Publication 502.

However, that list is a starting point. FSAs typically offer more spending leeway. For example, the aforementioned over-the-counter medications cannot be claimed as a medical expense deduction on your Schedule A, but you can use FSA money to pay for those items. Check your benefits plan documents for specifics, since the company, or more often, the firm it hires to administer it, has final authority regarding eligible expenses.

For an idea of the variety of medical expenditures allowed by some plans check out these Web pages:

• SHPS  
  
• Wage Works 
  
• ASIflex 
  
• HealthZone
  

Pharmacies, both brick-and-mortar chain stores such as Walgreens and CVS, as well as online sites such as DrugStore.com, have special online sites that highlight products usually covered by FSAs.

If you go into the actual store, don't forget to check your receipt. My local Walgreens' register tape notes that my sinus medication is FSA eligible.