This might be intuitive to some but I certainly had to think through it a bit.
The situation applies as follows: You have dual W-2 income wage earners in your family and one spouse's gross wages is over the income ceiling to be subject to the 6.2% Social Security FICA tax max while the other spouse is under the ceiling.
FSA's are a great tool for saving tax dollars for expenses that you would incur anyway. There a many types of FSA's but this analysis will focus on the two most common: Health FSA and Dependent Care FSA. In 2015, the Health FSA is limited to a $2,500 contribution. Also new for 2015, you can now rollover $500 of unused Health FSA money. Note that in most situations you can't contribute to a HSA and Health FSA, you must choose one. In 2015, the Dependent Care FSA is limited to $5,000. If you have a child in full time daycare you are likely paying this expense anyway and might as well get a tax benefit for it. There is no rollover to the Dependent Care FSA so you use it or lose it.
Let's look at the potential savings with some assumed tax rates. FSA's contributions are not subject to Fed, State and FICA withholding taxes so the savings are as follows:
Max Cont/Federal - 28%/State - 4%*/FICA-SS 6.2%/FICA-Med 1.45%/Total Savings
Dependent Care $5,000/$1,400/$144/$310/$73/$1,927
Health FSA $2,500/$700/$72/$155/$36/$963
Total $7,500/$2,100/$216/$465/$109/$2,890
* Also reduces federal itemized deduction so haircut by 28%
Total Savings - $2,890/7,500 = 38.5%
So best case scenario, you are effectively getting a 38.5% discount on your day care and health care costs up at the annual limit. Now if both spouses plans offer these benefits you might haphazardly sign up for the accounts under the higher earners plan. If the higher earner makes over $118,500 in 2015 gross wages you will pay the maximum FICA-SS tax anyway so you won't get the 6.2% savings (its actually 118,500 + 7500 = 126,000 to lose the entire $465. If you make between 118,500-126,000 you lose money on a sliding scale).
There are no rules that say you have to sign up for your FSA in the same company where you sign up for medical benefits. My company, along with my spouse's company allow us to sign up for FSA even if you don't elect medical insurance benefits with them. Finally, if you make over $250K as a household you are subject to an additional 0.9% medicare tax. This analysis assumes that does not apply.
With a max savings of about 38% depedning on you facts, FSA's are a great way to get an effective discount (up to $5,000 and $2,500 of expenses, respectively) on your child care and healthcare costs. Just make sure to think through this scenario so you don't end up giving the Government 6.2% of the savings back. Every little bit helps!
The situation applies as follows: You have dual W-2 income wage earners in your family and one spouse's gross wages is over the income ceiling to be subject to the 6.2% Social Security FICA tax max while the other spouse is under the ceiling.
FSA's are a great tool for saving tax dollars for expenses that you would incur anyway. There a many types of FSA's but this analysis will focus on the two most common: Health FSA and Dependent Care FSA. In 2015, the Health FSA is limited to a $2,500 contribution. Also new for 2015, you can now rollover $500 of unused Health FSA money. Note that in most situations you can't contribute to a HSA and Health FSA, you must choose one. In 2015, the Dependent Care FSA is limited to $5,000. If you have a child in full time daycare you are likely paying this expense anyway and might as well get a tax benefit for it. There is no rollover to the Dependent Care FSA so you use it or lose it.
Let's look at the potential savings with some assumed tax rates. FSA's contributions are not subject to Fed, State and FICA withholding taxes so the savings are as follows:
Max Cont/Federal - 28%/State - 4%*/FICA-SS 6.2%/FICA-Med 1.45%/Total Savings
Dependent Care $5,000/$1,400/$144/$310/$73/$1,927
Health FSA $2,500/$700/$72/$155/$36/$963
Total $7,500/$2,100/$216/$465/$109/$2,890
* Also reduces federal itemized deduction so haircut by 28%
Total Savings - $2,890/7,500 = 38.5%
So best case scenario, you are effectively getting a 38.5% discount on your day care and health care costs up at the annual limit. Now if both spouses plans offer these benefits you might haphazardly sign up for the accounts under the higher earners plan. If the higher earner makes over $118,500 in 2015 gross wages you will pay the maximum FICA-SS tax anyway so you won't get the 6.2% savings (its actually 118,500 + 7500 = 126,000 to lose the entire $465. If you make between 118,500-126,000 you lose money on a sliding scale).
There are no rules that say you have to sign up for your FSA in the same company where you sign up for medical benefits. My company, along with my spouse's company allow us to sign up for FSA even if you don't elect medical insurance benefits with them. Finally, if you make over $250K as a household you are subject to an additional 0.9% medicare tax. This analysis assumes that does not apply.
With a max savings of about 38% depedning on you facts, FSA's are a great way to get an effective discount (up to $5,000 and $2,500 of expenses, respectively) on your child care and healthcare costs. Just make sure to think through this scenario so you don't end up giving the Government 6.2% of the savings back. Every little bit helps!