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Tax Tip of the Week
For the week of
Novmber 17, 2003

Flexible spending accounts become more flexible

If you have a flexible spending account (FSA), life just became a little easier. Companies often include FSAs as part of a cafeteria plan of employee benefits. If you participate in a FSA, you can set aside pretax dollars from your paycheck to pay for certain unreimbursed health care or child care costs. The major problem has been that you forfeit any unused dollars in your account at the end of each plan year.

Under the old rules, allowable health care expenses included only those items that qualified as an itemized deduction under IRS rules — generally, prescription drugs, doctor, dentist, and hospital costs. But the IRS recently announced that non-prescription drugs and certain medical supplies will also qualify as allowable expenses in a FSA. This gives two advantages. Not only can you buy more items with pretax dollars, but it also makes year-end planning easier. Now, if you're at risk of forfeiting dollars in your account, you can always use the money to stock up on pain relievers or other everyday over-the-counter medications that you use.

A few words of caution though: Items such as vitamins or dietary health supplements don't qualify under the new rules. Toiletries and cosmetics are also ineligible. And this change affects only FSAs. There's no change in what you can claim as an itemized medical deduction on your tax return.

Before you rush out to the drug store, check with your plan administrator. Details of what's eligible and when the change takes effect may vary from plan to plan.

Click here to view previous tax tips.

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