FSA (Flexible Spending Account).

In plain English

An FSA is an employer-sponsored account that lets you set aside pre-tax money for medical expenses (Healthcare FSA) or for childcare/dependent-care costs (Dependent Care FSA). The contribution is deducted from your paycheck before taxes, lowering your taxable income. The 2026 limits are $3,400 for healthcare FSAs (with up to $680 carryover for plans that allow it) and $7,500 for dependent-care FSAs ($3,750 if married filing separately). Most FSAs are 'use it or lose it' within the plan year, with limited carryover or grace-period exceptions.

01Why it matters

If you have predictable medical expenses (regular prescriptions, planned procedures, glasses/contacts) or daycare costs, an FSA can save you 20-35% of those expenses by paying with pre-tax dollars. Dependent-care FSAs are particularly powerful for parents, $7,500 of pre-tax childcare contribution can save roughly $1,650 to $2,200 in taxes for a family in the 22% bracket plus payroll taxes.

02The math, step by step

A parent puts $7,500 into a Dependent Care FSA for daycare. They're in the 22% federal bracket and pay 7.65% FICA. The pre-tax move saves about $2,224 in taxes on that $7,500. Same daycare bill, $2,224 less out of pocket, provided they actually spend the full $7,500 within the plan year.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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