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November 16, 2004 09:41 PM

The Best Way to Save on Health-Care Costs


Excerpt: By taking advantage of this benefit, you can stretch the money available for medical expenses and reduce your federal-income and social-security taxes — and depending on where you live, your state and local income taxes as well. These accounts represent the only tax break available on medical expenses for most people these days.


WE DON'T NEED to tell you that health care is expensive. Americans spent some $212.5 billion, or roughly $725 per person, in out-of pocket expenses in 2002, according to the Center for Medicare and Medicaid Services. And unfortunately, there doesn't appear to be any relief in site. The cost of health care is rising at a double-digit pace, and employers continue to shift more of the financial burden to their workers.

Unfortunately, other than trying to eat right, exercising and hoping that genetics are on your side, there isn't much you can do to lower your medical bills. But you can lower your out-of-pocket expenditures if you participate in an employer-sponsored Flexible Spending Account (FSA), also referred to as a Medical Spending Account. More than 90% of large employers offer such a plan, according to Hewitt Associates, a benefits consulting firm. An FSA allows you to use pretax dollars to pay for medical expenses that aren't reimbursed by your health-insurance plan, such as your deductible, copayments for medicine, and noncovered expenses like eyeglasses. For someone in the 25% federal tax bracket, that means saving $33 on every $100 of medical costs.

Not a bad deal at all. By taking advantage of this benefit, you can stretch the money available for medical expenses and reduce your federal-income and social-security taxes — and depending on where you live, your state and local income taxes as well. These accounts represent the only tax break available on medical expenses for most people these days. Very few taxpayers have medical costs that exceed 7.5% of their adjusted gross income, the level at which they can begin to itemize medical deductions on their income taxes.

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