Health and Finance: FSAs and Taxes

It’s that time of year again, time for one of the most important parts of maintaining your financial health – filing an accurate and timely tax return. Whether you prepare your return yourself or hire someone to do it for you, the end result is only as good as the information you put into it.

Itemizing deductions can get tricky when it comes to health flexible spending accounts (FSAs) and other medical savings accounts. These employee benefits allow you to set aside pre-tax money to pay for health care and dependent care expenses throughout the year.

When preparing your taxes, it helps to know what types of costs qualify as medical expenses, what costs are reimbursable, and how those reimbursements affect your taxable income for the year.

“Legitimate medical expenses have an important place in the tax law that allows for reimbursements,” said IRS Commissioner Danny Werfel. “But taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don’t qualify as medical expenses.”

It is important to recognize the difference between medical expenses and food, wellness and exercise expenses. You may buy certain foods because they are healthy or help you manage a chronic condition, but that does not make those expenses medical expenses for tax and reimbursement purposes

The IRS is warning taxpayers about companies that claim their products can qualify as medical expenses when they are not. The agency is aware of several instances where a company offers a doctor’s note with the purchase of their products to be submitted to the FSA with a claim for reimbursement. These reimbursement claims are almost always denied.

The agency also points out that FSAs that pay for or reimburse non-medical expenses are not qualified plans. In non-qualified plans, reimbursements for medical or non-medical expenses are considered income.

To learn more about how your FSA reimbursements may affect your taxable income, consult the IRS website or a certified tax professional.