“Every year you have to guess how much money you’ll spend on health care. Guess right, you get a modest tax break; guess wrong, you light your money on fire.”
— Ian Millhiser (@imillhiser) December 21, 2022
Are you running around this week trying to use up your FSA funds? If so, you may have very well fallen into a trap. The trap is the desire to avoid taxes, even when it comes with a high cost in terms of your time.
Millions of Americans forfeit some of FSA dollar in any given year. You could argue they still make this on taxes avoided, but at what cost? Alex Tabarrok at Marginal Revolution writes:
I hate “flexible” spending accounts, i.e. those accounts where you put say $1000 in tax-free but you then must submit a bunch of health or education receipts to claim the money–and the “benefits manager” tells you half of the receipts you submitted are no good so you have to trawl through your files to find more–or lose the money. The whole process is demeaning.
There is a reason that policymakers put these these deductions in place. In part, because it shifts the burden of compliance onto employers and most importantly onto employees. This ‘time tax’ never shows up in the cost-benefit equation for policymakers.* Pamela Herd and Donald P. Moynihan in the Washington Post write:
It’s all a lot more complicated than it has to be, and a lot less beneficial to the American families FSAs are supposed to help. Policymakers need to break the habit of favoring complexity over simplicity.
Simplifying your finances is worth pursuing no matter what stage of life you are in. However ass we get older, simplifying our finances becomes even more critical. Not only for ourselves but for our loved ones as well. As Richard Connor at Humble Dollar writes:
Many of us want to simplify our financial life in retirement. Chasing higher yields may be financially rewarding, but it comes at the expense of increased complexity. We all have to decide how we want to balance the tradeoff between simplicity and return. It’s important to think about this early, and honestly, and then decide what makes sense for your situation.
People hate paying taxes. I get it. But don’t let your burning desire to avoid paying that last dollar of taxes blind you the time you will spend dealing with the administrative state.
*Then again, FSAs are nothing compared to the burden of paying income taxes. It is estimated Americans spend 6.5 billion hours each year doing their taxes. On the other hand, I would argue, something like a 529 plan is worth the additional hassle, especially in light of the enactment of SECURE 2.0.