Changes To Flexible Spending Accounts On the Horizon

A few months ago, the health care reform discussion was all the rage and dominated most news stories that were centered around politics.

Now that it’s been passed, I think people have moved on.  Most political discussions I hear of now seem to focus either on the upcoming elections or the government’s (lack of) response to the oil spill.

However, I thought it was noteworthy to go back to health care and point out a couple of pretty major changes to those that use flexible spending accounts to save money on health care related costs.

A flexible spending account, for those who may not be familiar, allows you to set aside pre-tax dollars that can then be spent on reimbursable health care costs, including co-pays, non-covered costs, prescriptions, and other items.  This essentially gives you a ‘discount’ equivalent to your marginal tax rate on health care costs.

So, what are the changes/

While I’m sure there are others, there are two that I was surprised about that I think will impact quite a few people:

  • Over-the-counter (OTC) medications will no longer be covered – Many OTC medications and items are currently covered as reimbursable items.  So, right now if you sprain your ankle, and hobble into the drugstore to get an Ace bandage and some Motrin, you can swipe your FSA card, and pay for this.  Beginning next year, this will no longer be the case.
  • FSA contributions will be capped – Right now, many employers will cap FSA contributions at their discretion, but with the new changes, FSA contributions will be capped at $2,500 per year.  I’m not certain on this, but I think this one has a couple of years before it’s implemented (2013 is what I’ve heard). So, if you have out-of-pocket costs over $2,500 and you’ve used a flexible spending account to reduce some of these costs, be prepared to pay more.

Both of these are examples of indirect taxes.  With this model, the government doesn’t directly raise your taxes through an increase in payroll deduction, but by moving things from the ‘pre-tax’ side of the fence to the ‘taxable’ side of the fence, they’ll end up collecting more revenue, revenue which was included in the cost factors that were part of the ‘Obamacare’ bill.

For us, the OTC will mean the biggest change.  It’s nice to be able to buy medicines, bandages, or other supplies, and have them payable by the FSA card.  Since FSA monies don’t roll over from year to year and they’re ‘use it or lose it’, the OTC coverage has allowed people to avoid losing money that they contributed.  Since FSA contributions are often a ‘guessing game’, you might end up with money at the end of the year.  If you have $100 remaining, why not go to the drugstore and stock up on some bandages, cold medicine, nighttime medicine?  Everybody wins, right?  Well, yeah, except the government who was looking at those missed tax revenues.

Were you aware of these changes or did the politicians do a good job at ‘sneaking these in’?  How will these changes affect you?

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Taxes Are Done

Our taxes came back from the accountant and I was pleasantly surprised.  I had estimated our federal return using a couple of the online calculators.  I was close but we actually came away with about $200 more than I’d thought.  Our federal return goes as a straight percentage allocated to the following:

  • Debt Payoff – 25% – We are working to be all-but-mortgage-debt-free by the end of 2012 and this will help us take a big step towards that goal
  • Vacation Fund – 10% – We like to go on vacation now and then, and this will help pay for our trips
  • Home Repairs / Renovations – 25% – Our house is just a touch over ten years old, so I expect that bigger ticket repairs will start piling on in the next few years, such as roof, windows, driveway, furnace, water heater, etc. and this will help defray some of those costs
  • Car Repair – 5% – This is to defray unexpected car repairs, insurance deductibles, or big ticket repairs like brakes or tires
  • New/Used Car Fund – 25% – We don’t have any car loans and I’d like to keep it that way.  We purchased a used car last year, so we should be set for a few years, but this will allow us to start re-building this fund since it was depleted with our recent purchase.
  • Family Expenses – 10% – We had built a nice fund when we had Baby Beagle so that we were able to pay for big ticket items that we didn’t receive as shower gifts.  We have future plans (nothing imminent, I promise) to continue to grow our family, so this will help defray some of those costs for when the time comes.

As you can see, our federal return goes largely towards paying off things that we haven’t purchased yet.  This is done intentionally for the simple reason that, as we work towards our goal of paying off debt, we also have a goal not to take on any new debt if at all possible.  Saving money for expenses we know are coming will help us maintain this goal.

Our state refund was also a couple hundred dollars bigger than we had expected.  With our income falling from 2008 to 2009 due to my wife working only part of the year, we qualified for a bit of a refund on our property tax expenses that I hadn’t been anticipating.

Our allocation of this will be for more current items:

  • Debt Payoff – 25% – It’s our standard to use 25% of cash inflows to pay down debt and we plan on doing the same with this.
  • Carpet Cleaning – We would like to get our carpets cleaned annually and it will be time in the spring
  • Lawn Mower Repair – My lawn mower is a couple of years old and I’d like to have a general repair done.  We have a lot of nuts and twigs that fall on our grass, so I’m sure that the blades need to be sharpened, and there’s a local place that does a tremendous job with yard equipment.
  • Furnace Tune-Up – I’m embarrassed to say that we haven’t yet had our furnace cleaned and tuned up, and I know that most guidelines for reducing heating/cooling costs tell you that this is something you should do every year or two.
  • Tree Trimming – This is something that, with many trees on our yard and near our house, needs to be done every two to three years.

We may not get to everything from the state return, but we should be able to get a big chunk of our list done, and all of the items are things that my wife and I agree need to be done to keep our house and yard in the condition that we desire.

Now, we just have to wait for our returns!

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Getting Our Tax Information Ready

I think this is the earliest I’ve gotten everything together.  We have an accountant that does our stuff, so it’s all packaged and ready to get dropped off.

This is the earliest I think I have it all ready.  I know this because every year when I finish things off, I create a little Word document that has miscellaneous information that doesn’t have documentation, and the ‘Save’ date was five days earlier than I’ve had in years past!

It was pretty easy to get everything together.  Here’s the process we used:

  • Get a file folder for tax stuff – As soon as the first piece of information came in the mail, I grabbed a file folder and started putting everything into that
  • Create a checklist of old stuff – There are certain things that happen every year that I know we need before we have all the information.  W-2’s, interest statements, investment statements, student loan statements, etc.  It’s pretty easy to gather a list of everything you had in years past especially if you peruse last year’s returns.
  • Create a checklist of new stuff – If you opened any new accounts or had anything life-changing, make sure this is accounted for.  We had to add Baby Beagle’s information to our recordkeeping, as well as information about our 529 plan that we opened for him, since we’ll get to write those contributions off against our state taxes.  I also reviewed our car transactions (selling a car, purchasing a new one) to make sure that there wouldn’t be any possible tax implications. 
  • Use online resources – More and more access is available online, including year-end tax statements.  In year’s past, some stuff would get sent out on January 31st, but I found that the statements were available online well in advance of that, so I was able to print out the couple of items that hadn’t yet arrived.
  • Estimate – I plugged in our numbers on a couple of the websites that let you estimate your return, so I have a general idea of what to expect for our refund this year.  It’s always helpful to know that.  Although I could probably do it myself, I find that I’m just more comfortable having a professional do it, just to make sure that everything is squared away.

Happy taxes!

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Not Understanding Withholding Rates

Something has been sort of bugging me, and today I ran some numbers to verify that I should be concerned. I noticed after I changed my marriage status from SINGLE to MARRIED after getting married last year, that my take home pay increased.
I didn’t add any allowances from what I’d filed with when I was single. Nothing else changed, so I’m confused as to why the withholding rates suddenly change. I verified today that in years past, they took out about 18-20% in federal withholding. I’m making the same as last year, yet it’s only around 14%. Yet, somehow I have a hard time believing that I’m going to pay less taxes.
My wife’s withholding is even worse. She makes less, and for last year, they took out about 15%. Now, they’re barely taking out 5%. What the heck???????
This shouldn’t affect us too much, because when I noticed the increase, I started simply taking the ‘extra’ amount in my paycheck and putting it into savings. I figured I’d just combine that with whatever return we got to get our ‘total ‘return, and it wouldn’t end up too much differently than what we got as a total refund last year.
Still, this seems rather dangerous to me, because it seems to me that a couple that didn’t save that ‘extra’ money might spend it and end up owing money to the government come next April 15th.
Am I missing something totally obvious here?

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