How it works
A flexible spending account lets you set aside part of your pay before tax for medical costs (a health FSA) or childcare (a dependent care FSA). The money skips federal income tax, most state income taxes, and the 7.65% Social Security and Medicare tax. The catch: you choose the amount once a year at open enrollment, and money you don't spend is mostly lost.
Net gain = amount set aside × (federal + state + 7.65%) − what you lose at year end
Worked example
You expect $2,400 of copays, prescriptions and dental work, and you're in the 22% bracket with a 5% state tax. Putting $2,400 in a health FSA saves $832 in tax.
Put in the $3,400 maximum but spend only $2,500, and $900 is left. If your plan carries over up to $680, you lose $220 and still come out $958 ahead. If it doesn't, you lose all $900, and the gain shrinks to $278.
FSA vs HSA
Both save tax on health costs. An HSA needs a high-deductible health plan, but the money is yours for good: it rolls over every year, stays with you when you change jobs, and can be invested. An FSA works with most employer plans and gives you the full year's amount on day one, but unspent money is mostly lost, and it stays with the employer. You generally can't have both a health FSA and an HSA in the same year, except a limited-purpose FSA for dental and vision. See the HSA calculator.
Things to know
- 2026 limits. $3,400 for a health FSA, with up to $680 carried over if your plan allows it. $7,500 a household for dependent care ($3,750 if married filing separately), up from $5,000.
- Your full health FSA is available on day one. You can spend the year's amount in January, even though it comes out of your pay over the year.
- What counts. Deductibles, copays, prescriptions, glasses and contacts, dental and many over-the-counter items. IRS Publication 502 lists qualified medical costs.
- Dependent care and the tax credit. Money you use from a dependent care FSA can't also count toward the child and dependent care credit. For many families the FSA saves more, but compare both.
- 2027. The IRS publishes next year's health FSA limit in the fall. We'll add it once it's out.
- FSA or HSA? You can't fund both a regular health FSA and an HSA. If your employer offers a high-deductible plan, the HDHP vs PPO calculator shows whether it beats a PPO once the HSA is counted.
- This is an estimate, not tax advice. It uses your top federal bracket for the whole amount.
Questions people ask
How much should I put in my FSA?
What you're fairly sure to spend: your regular prescriptions, planned dental or vision work, and your usual copays. If your plan has a carryover, going a little over is less risky.
What happens to FSA money I don't use?
Depending on your plan, up to $680 can carry into next year, or you get a grace period of up to 2½ months to spend it. Anything beyond that goes back to the employer.
Can I change my FSA amount during the year?
Only after a qualifying life event, such as marriage, a birth or adoption, or a change in employment. Otherwise the amount is set at open enrollment for the whole year.
Sources
- IRS: Rev. Proc. 2025-32, §4.15 (2026 health FSA limit $3,400 and $680 carryover)
- IRS: Publication 15-B (2026), dependent care assistance ($7,500 from 2026)
- IRS: Publication 969, flexible spending arrangements
- IRS: Publication 502, medical and dental expenses
Reviewed September 29, 2026 by The Dollars World team. How we build and check our calculators · Our data and formulas. This is general information, not financial advice.