As the end of the year is quickly approaching, there are few financial housecleaning chores some of us need to take care of.
For those of you involved in a company Flex Plan or Flexible Spending Plan (Account), then this article is for you.
In a nutshell, flex plans are fringe benefits that are offered by many companies that allow employees to direct a portion of their pay into a special account which they can then tap into throughout the year, to pay for child-care or medical bills.
The main advantage of a Flex plan is the money that goes into the holding account avoids both income and Social Security taxes.
By avoiding a 25% federal income tax bracket in addition to the 7.65% Social Security tax, then roughly $1,000 funneled through a flex plan can pay bills it would take $1,554 of salary to pay.
The IRS never make sit easy and there’s always a catch with these type of special accounts. The catch in this case is the infamous “use it or lose it” rule. You must decide at the beginning of the calendar year how much to contribute to the plan. If you don’t use it all by the end of the year, you then forfeit the excess amount in the account.
The “use it or lose it” rule used to create a mad rush to drug stores, dentists and optometrists each December as employees with leftover money in their accounts to spend, rushed to use it before it disappeared. Luckily, now the IRS allows companies to build in a two and one half month grace period. This change now allows employees to spend 2008 set-aside money, for example, as late as March 15, 2009.
But pay attention to the small print. You only get this break if your company has adopted the grace period rule. Please make sure you fully understand your own firm’s rules. If you don’t have that carry-over rule to utilize, then you need to take action and spend any leftover money by December 31st.
Another point to consider, is looking at what you plan to set aside for next year. Look at your current set-aside and spending patterns and adjust your withholding amount as needed.
If you are wavering as to how much, you want to be favor on the aggressive side. A Flexible spending plan is a very powerful tax-saver. Even if you are off in your withholding amount, you can actually forfeit 25% or more of the money and still come out ahead of the game.
It’s important to know that you don’t want to forfeit even an extra penny, so do not go crazy in your estimate. On the other hand, you don’t want to cheat yourself by being cautious and shy away from the “use-it-or-lose-it” rule.
{ 0 comments… add one now }