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Don’t Miss Out on Your Employer’s Flexible Spending Benefits
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Article Highlights:Health Flexible Spending Arrangement (FSA)Benefits of an FSAQualifying for an FSAContributions to an FSAAmount of ContributionDistributions From an FSAQualified Care ExpensesQualified Medical ExpensesUse-It-or-Lose-It A health Flexible Spending Arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No federal income tax or employment (Social Security and Medicare) taxes are deducted from your contribution and the employer may also contribute. Generally, you must designate how much you want to contribute at the beginning of the plan year. Unfortunately, self-employed persons aren’t eligible for FSAs, and employers aren’t required to sponsor FSAs.Unlike contributions to and distributions from HSAs that must be reported on your Form 1040, there are no income tax return reporting requirements for FSAs.Benefits of an FSA – Employees may enjoy several benefits from having an FSA.Contributions made by the employer can be excluded from the employee’s gross income.Contributions made by the employee are excluded from the employee’s gross income.No employment or federal income taxes are deducted from the contributions.Reimbursements are tax free if paid for qualified medical expenses, which includes many over-the-counter items.The maximum employee contribution for 2024 is $3,200.Qualifying for an FSA - Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have flexibility to offer various combinations of benefits in designing their plans. Contributions to an FSA- You contribute to your FSA by, at the beginning of the plan’s year, electing an amount to be voluntarily withheld from your pay by your employer. This is sometimes called a “salary reduction agreement.” The employer may also contribute to your FSA if specified in the plan. Amount of Contribution-For 2024, salary reduction contributions to a health FSA can’t be more than $3,200 a year (or any lower amount set by the plan). This amount is indexed for inflation and may change from year to year.Generally, contributed amounts that aren’t spent by the end of the plan year are forfeited (to the employer). However, there are possible exceptions. For this reason, it is important to base your contribution on a reasonable estimate of the qualifying health care expenses you expect to have during the year.Distributions from an FSA - Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage and documented by a third party. You must be able to receive the maximum amount of reimbursement, and the maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.Some employers provide debit cards, credit cards, and stored value cards to be used to reimburse participants in a health FSA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the health FSA.Qualified Care Expenses - Qualified medical expenses are those specified in the plan that would generally qualify for the Schedule A medical and dental expenses itemized deduction.Qualified medical expenses are those incurred by the following persons.The employee and employee’s spouse.All dependents the employee claims on the employee’s tax return.Any person you could have claimed as a dependent on the employee’s return except that:a. The person filed a joint return.b. The person had gross income of $5,050 or more (this number is annually adjusted for inflation and was $4,700 in 2023); orc. The employee, or spouse if filing jointly, could be claimed as a dependent on someone else’s tax return for the tax year.Your child under age 27 at the end of your tax year.
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Tax and Financial Insights
by NR CPAs & Business Advisors
2026 IRS Mileage Rates: Key Updates and Insights
The IRS has rolled out the inflation-adjusted mileage rates for 2026, offering taxpayers an efficient way to claim deductions for vehicle-related expenses incurred for business, charity, medical, or moving purposes. These adjustments reflect the continued economic shifts impacting car operation costs.
Effective January 1, 2026, the new standard mileage rates are established as follows:
- Business Travel: Increased to 72.5 cents per mile, inclusive of a 35-cent-per-mile depreciation allocation. This marks a rise from the 70 cents per mile rate set for 2025
- Medical/Moving Purposes: Reduced slightly to 20.5 cents per mile, down from 21 cents in the previous year, reflecting the variable cost considerations.
- Charitable Contributions: Consistent at 14 cents per mile, a fixed rate unchanged for over a quarter-century.
As is typical, the business mileage rate considers the integral fixed and variable costs of automobile operation. Meanwhile, the medical and moving rates remain contingent on variable expenses as determined by the IRS study.
It is critical to note that the One Big Beautiful Bill Act (OBBBA) held firm on disallowing moving expense deductions except for specific cases within the Armed Forces and intelligence community, marking a substantial shift since 2017.
When engaging in charitable work, taxpayers might opt for a direct expense deduction over the per-mile method, covering gas and oil costs. However, comprehensive upkeep and insurance costs are non-deductible expenses.
Business Vehicle Use Considerations: Taxpayers can alternatively compute vehicle expenses using actual costs, which might benefit from shifting depreciation rules, particularly through bonuses and first-year advantages. Keep in mind, however, reverting from actual cost calculations to standard rates in subsequent years is restricted, particularly per vehicle protocol and when exceeding four vehicles in concurrent use.
Additionally, parking, tolls, and property taxes attributable to business can be deducted independently of the general rate, an often-overlooked advantage by many business owners.
Tax Strategies for Employers and Employees: Reimbursements based on the standard mileage framework, providing the right documentation is in place, remain tax-free for employees. Meanwhile, the elimination and continued prohibition of unreimbursed employee deductions continue, with particular exceptions offered to qualified personnel across specific occupations.
Opportunities for Self-employed Individuals: Entrepreneurs remain eligible for deductions on business-related vehicle use via Schedule C, with potential to account for business-use interest on auto loans.
Heavy SUVs and Deduction Advantages: Heavier vehicles exceeding 6,000 pounds but under 14,000 pounds open opportunities for substantial tax deductions through Section 179 and bonus depreciation avenues. The lifecycle of such a vehicle bears implications on recapturing initially claimed deductions, urging cautious tax planning.
For professional guidance on optimizing your vehicle-related tax deductions and understanding their implications on tax strategies, contact our office in Coral Gables, Florida, where expert advice and strategic insights are just a call away.
Educator's Deduction Reform: Key Changes Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduces significant enhancements for educators' tax deductions starting in 2026, offering both strategic opportunities and planning considerations for educators who qualify. With the reinstated itemized deduction for qualified unreimbursed expenses, educators have a broader spectrum of financial relief. This is complemented by the retention of the $350 above-the-line deduction, allowing educators to maximize their tax benefits by selectively allocating expenses between these avenues.
Understanding the nuances of these changes is crucial for educators and financial advisors alike. The dual-option deduction strategy can potentially enhance tax efficiency, thereby aligning with broader financial planning goals.
At NR CPAs & Business Advisors, based in Coral Gables, Florida, our expertise in tax preparation and planning provides invaluable support to educators navigating these changes. Our comprehensive approach, combined with personalized advice from our experienced team, ensures compliance and optimization in line with the latest tax legislations.
Given these updates, it is imperative to engage with seasoned professionals to fully leverage your deduction strategies. Contact us today to streamline your tax planning under OBBBA's new guidelines and maximize your deductions for upcoming tax years.
