What Is An FSA & How Does It Impact Your Taxes?

Maintaining your physical and mental health can be expensive, especially if your insurance doesn’t cover everything you need. Fortunately, a flexible spending account (FSA) can help reduce your taxable income and ensure you set aside money for these costs.

What is a flexible spending account?

An FSA is a special type of account that allows you to set aside money to cover out-of-pocket medical costs. You don’t pay taxes on the money you contribute to your FSA, which makes it easier to pay for qualified medical expenses.

Your FSA can be used to cover a wide range of medical expenses, including deductibles, copayments, and coinsurance. You can even cover the cost of certain drugs through your FSA.

Since FSA contributions are tax-free, it’s beneficial to cover medical expenses with your FSA than to spend your post-tax income on qualified expenses. By opening an FSA or HSA, you get more bang for your buck when you use your account to cover qualified expenses.

How does an FSA work?

Health insurance generally covers a portion of your medical expenses, which means you’re left with deductibles and copayments. While some health insurance plans cover most medical expenses, others may only cover a small amount.

When your health insurance doesn’t cover everything, you can use the money you’ve set aside in your FSA to pay for the remaining expenses. Your FSA can even be used to cover certain dental costs.

The funds in your FSA can cover medical expenses for yourself, your dependents, and your spouse if you’re married. However, you can’t use an FSA account with a Marketplace insurance plan — you have to use an HSA instead.

You can contribute a set amount to your FSA account each year — for 2024, it’s up to $3,200, and for 2025 it’s up to $3,300. Your employer can also contribute to your FSA account, but they don’t have to. If you’re married, your spouse can also contribute up to $3,300 to an FSA through their employer for 2025.

When you need to use your FSA to cover medical expenses, you can contact your employer to file a claim. You need to provide proof of your medical expenses that weren’t covered by your health insurance plan. If your claim is approved, you’ll be reimbursed.

How is an FSA different from an HSA?

If you have an employer-sponsored health insurance plan, you can open a healthcare FSA account through your employer to cover additional medical costs. If you have a high-deductible health plan or Marketplace insurance plan, you can open an HSA.

A health savings account (HSA) is similar to an FSA, but you’re only eligible if you have an HSA-eligible plan — which includes Marketplace plans and high deductible health plans. You can contribute pre-tax dollars to your HSA and use it to cover copayments, deductibles, and other expenses.

One key difference between an FSA vs. HSA is the way contributions work. While FSA contributions don’t earn interest, HSA contributions do.

HSA contributions can be made with pre-tax (deducted directly from your paycheck) or post-tax dollars (made by you after you’ve been paid). In 2025, you can contribute up to $4,300 ($5,300 if you are 55+) to an individual plan and up to $8,550 to a family plan. If you choose to contribute post-tax dollars instead of making contributions directly from your paycheck, you may be able to take a deduction for your contributions.

While there are some advantages to HSAs, they’re not for everybody. If you don’t have a High-Deductible Health Plan (HDHP), you can’t open an HSA.

What types of expenses qualify?

FSAs can be used for a wide variety of costs. Generally speaking, you can use your FSA to cover larger expenses, like psychological treatment and deductibles, as well as smaller expenses that can add up, like menstrual care and medical supplies. 

If you were prescribed medication by your doctor, you can use FSA funds to cover those costs. This applies to any medication your doctor prescribes that you pick up at a pharmacy. In some cases, over-the-counter drugs are also qualifying FSA expenses. If your doctor prescribes an over-the-counter medication, you can use your FSA to pay for it.

Even if you don’t have a prescription from your doctor, you can receive reimbursements for insulin through your FSA. This also applies to insulin-related expenses, including syringes. Keep in mind that insulin may not be an eligible expense with certain types of FSAs. For example, insulin isn’t eligible with a limited-purpose FSA or a dependent care FSA.

In addition to general medical expenses, your FSA can also cover dental expenses. Some examples of FSA-eligible dental expenses include:

• Teeth cleaning
• Dentures
• Crowns
• Tooth extraction
• Diagnostic and preventative services
• Treatment for gum diseases and necessary oral surgery

The specifics of your FSA may exclude certain dental and medical expenses. If you’re not sure whether a particular expense is covered, reach out to your employer to find out more about your FSA.

What are the advantages of an FSA?

The biggest advantage of using an FSA revolves around health insurance and your taxes. If you have predictable medical expenses, contributing to an FSA can help you save money by lowering your taxable income and ensure you have some money set aside to help cover your health-related costs for the year.

Everything you contribute to your FSA is tax-free, which means you have more money to cover medical expenses than you would if you used post-tax dollars. These tax savings really add up when you’re contributing the maximum amount each year and using it for routine expenses.

If you’re not using your FSA for predictable medical expenses, you can still use it for any unexpected expenses or emergencies. If you still have money left in your FSA at the end of the year, you can roll over some of the funds to the next year if your plan allows it. For 2024, the carryover limit was $640. For 2025, you can carry over up to $660.

In some cases, you may have a grace period of up to 2 ½ months to spend the money in your FSA after the year’s end. However, these options are at your employer’s discretion.

What are the potential drawbacks of an FSA?

While there are some standout benefits to having an FSA, there are also potential drawbacks. Before you start contributing to your FSA account, you should look at your annual medical expenses and talk to your employer about the details of your FSA.

While you can contribute to an FSA tax-free, those contributions can go to waste since FSAs are use it or lose it if you don’t use them by the end of the year. You may be allowed to roll over a portion of your maximum yearly FSA contributions in some cases, but it’s up to your employer.

The IRS decides what’s eligible and how much you can contribute, which means certain costs may not be covered, and contribution limits can change over time. If you have an FSA, make sure you stay up-to-date with plan requirements.

At the end of the day, only you can decide if an FSA is right for you. Can you comfortably contribute part of your paycheck to an FSA? Do you have predictable medical expenses your insurance doesn’t cover? Ask yourself these questions before you open an FSA.

What are the FSA contribution limits?

Each year, the IRS sets a specific contribution limit for FSA accounts. For 2025, the IRS has set the contribution limit at $3,300 for single filers. In 2024, the limit was $3,200.

If you’re married, you and your spouse can each contribute up to $3,300 for a total of $6,600. You can use these FSA funds to cover qualified medical expenses for your spouse and dependents as well as yourself.

Can FSAs be used with Marketplace plans?

FSAs are designed to supplement your current health insurance plan, so you may be wondering if your Marketplace plan is eligible. Unfortunately, you can’t use an FSA with a Marketplace health insurance plan.

Instead of using an FSA to cover medical expenses, you’ll need to use an HSA. HSAs do offer some benefits over FSAs — for example, they earn interest while FSAs don’t. As long as you have an HSA-eligible plan, you can contribute to and use an HSA.

If you’re not sure whether an HSA or FSA is right for you, talk to your employer and plan providers about what the plans cover.

No matter what plan you choose, TurboTax has got you covered and is here to help you maximize your tax savings. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund — guaranteed.