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December 2, 2004 09:45 AM

Don't Fear the Use-It-Or-Lose-It Rule


Excerpt: That sounds dangerous. But the tax breaks are so great that you can -- and should -- be aggressive when deciding how much to put in your account. Sure, you don't want to forfeit a single dime. But remember this: The savings are so powerful that even if you wind up forfeiting 20% of what you put into a plan, you'll still come out ahead.


This is the time of year millions of employees are asked to sign up for reimbursement plans at work to pay for child care and medical bills. And far too many of us take far too little advantage of this terrific fringe benefit.

The beauty of these plans is that they let you pay your bills with pre-tax dollars. Salary that goes into the plans dodges federal income and social security taxes and, in all states but New Jersey, state income tax, too. Put $5,000 into a plan to pay child care bills that you have to pay anyway, for example, and you might save you $2,000 or more in taxes.

But many employees are leery of these plans because of the use-it-or-lose-it rule. You have to decide up front how much to put in the plan and if you don't spend it all within a year, the leftover amount is forfeited.

That sounds dangerous. But the tax breaks are so great that you can -- and should -- be aggressive when deciding how much to put in your account. Sure, you don't want to forfeit a single dime. But remember this: The savings are so powerful that even if you wind up forfeiting 20% of what you put into a plan, you'll still come out ahead.

Say you set aside $5,000 for medical expenses in 2005 and wind up spending just $4,000. You lose $1,000. Ouch! But think about this: If you're in the 25% federal tax bracket and face a 5% state income tax as well as the 7.65% social security and medicare tax, running $5,000 through the plan saves you more than $1,800 in taxes. Or, put another way, you'd have to earn almost $6,300 to have $4,000 leftover to pay those bills. So, even if you forfeit $1,000 you come out ahead.

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Read all 46 posts in the same category of Tax:

Few People Aware Of New State Sales Tax Deduction - Dec 17, 2004
Ownership Has Its Privileges - Dec 12, 2004
Bush Rejects Raising Taxes to Pay for Social Security Plan - Dec 12, 2004
Social Security Reform, With One Big Catch - Dec 12, 2004
Bush Eyes Social Security Threat - Dec 12, 2004
Put Away Your Check Book - Dec 10, 2004
IRS to Issue Rules On Tax Shelters - Dec 09, 2004
Year-End Tax Planning Moves for Small Businesses - Dec 08, 2004
Give Tomorrow, Get the Tax Break Today - Dec 08, 2004
2004 Year-End Tax Planning Moves - Dec 08, 2004
CCH Capital Changes Identifies Top Ten Tax-Complex Corporate Actions for 2004 - Dec 07, 2004
GainsKeeper Suggests Year-End Tax Planning Strategies to Minimize 2004 Taxes Owed - Dec 07, 2004
Stocks That Need Special Tax Moves - Dec 07, 2004
Poll: Social Security Needs Reform - Dec 07, 2004
Options Open On Tax Reform - Dec 07, 2004
More Tips to Slash Tax Tab - Dec 05, 2004
10 Tax Time Bombs To Defuse Now - Dec 04, 2004
Property Taxes Rising Nationwide - Dec 04, 2004
Noncash Gifts To Charities Can Be Deducted - Dec 04, 2004
2004 Year-End Tax Planning Moves - Dec 02, 2004
Get Your Car Ready for a Fast Giveaway - Dec 02, 2004
Partnerships Lose Tax Exclusion On Canceled Debt - Dec 01, 2004
A Tax Break for Your Kidney - Dec 01, 2004
8 Profitable Year-End Tax Moves - Nov 29, 2004
Tax Break Curbed: Changes To Donation Write-Off May Hurt Charities - Nov 28, 2004
When Is That Holiday Turkey Taxable? - Nov 26, 2004
Your Next Tax Hike - Nov 26, 2004
Line Up Your Tax Deductions - Nov 26, 2004
Last Chance to Trim Your Taxes - Nov 23, 2004
Know Your Optimal Year-End Tax Strategies - Nov 22, 2004
To the Point of No Returns - Nov 22, 2004
Turning the Tax Tables to Help the Poor - Nov 22, 2004
With Checkbook in Hand, Think of Uncle Sam - Nov 22, 2004
Moratorium On Web Tax Advances - Nov 17, 2004
25 Ways to Spend Your Flex Account - Nov 17, 2004
Bush Advisors Urge Deeper Tax Cuts In 2nd Term - Nov 17, 2004
The Best Way to Save on Health-Care Costs - Nov 16, 2004
Use it or Lose It - Nov 16, 2004
A New Twist To Your Tax Bill? - Nov 16, 2004
Taxes and Consequences: The Second Term Begins - Nov 13, 2004
Microsoft Payout Tempts Investors On Tax Strategy - Nov 12, 2004
What the Recent Tax Changes Mean to You - Nov 07, 2004
Highlights of 2004 Changes in the Income Tax Laws - Nov 04, 2004
Bush's Tax Cuts Are Unfair ... To the Rich. - Nov 03, 2004
No Rest for the Bleary: New Tax Turns to Ponder - Nov 03, 2004