Tax Tips – September/October 2022

Now is a good time to check your FSA balance

If your employer provides you with a flexible spending account (FSA) for health care expenses, it’s a good idea to check your account balance. Also, familiarize yourself with the terms of your employer’s plan to see if it allows you to carry over some of your account balance (up to $500) to next year or offers a grace period (up to 2½ months) to spend the funds.

If some or all of your FSA balance will be forfeited at the end of the year, try to spend as much as possible on covered expenses by December 31. You can use FSA funds for a wide range of health care expenses, including over-the-counter medications, menstrual supplies, heating pads, orthopedic shoe inserts, certain skincare products, and masks and other COVID-19-related supplies.

Can you rely on IRS-issued FAQs?

IRS penalties for noncompliance with tax laws or regulations can be harsh, but in many cases it’s possible to avoid them by showing “reasonable cause” for a particular tax position. Recently, the IRS announced that taxpayers may now assert reliance on IRS-issued frequently asked questions (FAQs) in demonstrating reasonable cause. The FAQs are posted at IRS.gov.

To avoid penalties, you’ll still need to show that reliance on a particular FAQ was reasonable and in good faith. But the new policy may make it easier for many taxpayers to obtain penalty relief.

A Roth IRA for your child isn’t as strange as it sounds

Roth IRAs can be a great way to teach your kids about saving and financial responsibility, while giving them a big head start on retirement planning. And because a child’s tax rate is likely to be astronomically higher when it’s time to withdraw the funds, the advantage of tax-free distributions is significant.

To be eligible, your child must have earned income that equals or exceeds the contributions to the Roth IRA. But the contributions don’t have to come from the child’s earnings; anyone can contribute to the child’s account.

A Roth IRA can provide your child with a nice supplement to his or her other retirement savings. Consider this example: John opens a $1,000 Roth IRA for his daughter, Daisy, when she’s 15 and contributes $50 per month until she turns 25. Daisy continues the $50 per month contributions for another 10 years, until her income reaches a level that disqualifies her from making Roth IRA contributions. Assuming a 7% rate of return, by the time Daisy retires 30 years later, the account will have grown to nearly $250,000.

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