Your taxable income is reduced by the amounts you deposit into your FSA accounts, up to IRS limits.
Health care expenses
Use your health care FSA or limited-expense FSA money to pay for qualified medical expenses.
Dependent care expenses
If you have children under 13 or adult dependents who aren’t capable of caring for themselves, you can use your dependent care FSA to pay for eligible daycare expenses.
FSAs have a “use it or lose it” rule, meaning you can’t carry money from one year over to the next. Be sure to estimate your contributions carefully. Even if you leave funds behind, however, there’s a good chance you’ll still come out ahead due to the tax savings.
Here’s an example based on having $100 withdrawn from every paycheck and deposited into an FSA:
Federal income tax (25%) – $25.00
State income tax (5%) – $5.00
FICA (7.65%) – $7.65
Tax savings every paycheck – $37.65
Tax savings annually (24 pay periods) – $903.60