Use it or Lose it! Health Flex Spending Arrangement Rules Changing

Do you have funds in an employer provided Health Flexible Spending Arrangement (FSA)? If you worry about the long-standing rule of using up those funds or you’ll lose them, then a new notice from the IRS could be helpful for you this year.


Millions of Americans take advantage of their employer’s cafeteria plan that allows setting aside pre-tax dollars to be used to pay for qualified health care expenses. The problem with these plans has always been that if you do not use the funds in the account by the end of the year they would be forfeited. Some employers have established an allowable “grace period rule” that gives an additional two months and 15 days to use the funds before they are forfeited.

The maximum annual amount that can be set-aside in Health FSA’s was recently set at $2,500 (indexed to inflation after 2012). This new limit is meant to help pay for the new Health Care Law. With this law change, the IRS agreed to reconsider the long-standing “use it or lose it” rules within FSA’s.

New rules

Effective in 2013, employers can opt to change their Health FSA plans to allow up to $500 in unused funds to be carried over into the following year. If an employer opts to do this, they need to forgo any allowable grace period rules currently within their FSA plan.

What you need to know

  1. Don’t assume you can carry over $500. With all the press around this rule change, many run the risk of assuming you don’t have to spend all your FSA funds by the end of the year. Remember, your employer must first make the rule change in their FSA plan before you can carry over unspent funds.
  2. Look for a notice. Ask your employer’s human resource department what the company’s plan is with the new rule. You will need to plan for next year’s withholding based on their answer.
  3. Contributions and spending must match. Just because you carry over $500 into next year, do not assume you can ask for expense reimbursements over the $2,500 limit during any one year. You cannot. So if you carry over funds, you may need to reduce your contribution into your FSA the next year.

Sound confusing? It can be. Until you receive definitive word your employer is changing their plan, it is best to use up your FSA funds prior to the end of your plan year.

Document those Non-cash Charitable Donations! Tips to ensure their deductibility

One often over-looked way to reduce your tax obligation is to donate gently used items to a favorite charity. Too often this is done without the necessary forethought to ensure you can deduct the value of these donations on your tax return. Here are some tips to ensure you can receive this tax benefit.

  • Good or Better Condition. Remember only items donated that are in good or better condition can be used as a charitable contribution on your tax return.
  • Document your donation. Fill out a donation sheet each time you donate. The sheet should include the name of the charitable organization, address, date, and types of items donated. It should also include a detailed list of the items donated, their initial value and the donated value. Note the value you are assigning to each item donated.
  • Take a Photo. Use this photo as a visual documentation of what you donated.
  • Get an acknowledgement and receipt. Even if the donation is small, always ask for an acknowledgement of your donation. Even churches should be ready and willing to do this for you.
  • Establish reasonable value. Do not overstate the value of the items you donate. Use places like e-bay, Amazon, the Salvation Army and used book/consignment stores to establish the used values of your items.
  • Donate entire ownership. The IRS does not like donation of part ownership of items. It is always best to make donations with no strings attached.
  • Track your mileage too. Remember even your miles driven to and from the charitable location are deductible too.
  • Have your warning antenna go up. The IRS has special rules for charitable donations. While they can be complex, here are some red flag items that should warrant consultation prior to donating the following:
    • Any stocks and investments owned for one year or longer
    • Any items valued over $250 or $500 or $5,000. Each of these levels can introduce new documentation requirements and a potential requirement for appraisals.
    • Cars, boats, RVs, and other major assets
    • Giving items to unfamiliar charitable organizations

Defending Fair Market Value

“Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”

Source: IRS Publication 561

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation. The difficulty here, is if the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but penalties to boot. Here are some tips to help defend your FMV in case of an audit.

Understand when it is used

Fair Market Value or FMV is used whenever an item is bought, sold, or donated that has tax consequences. The most common examples are:

  • Buying or selling your home or other real estate
  • Buying or selling personal property
  • Buying or selling business property
  • Establishing values of other business assets like inventory
  • Valuing charitable donations of personal goods and property like automobiles
  • Valuing bartering of services
  • Valuing transfer of business ownership
  • Valuing the assets in an estate of a deceased taxpayer

Ideas to defend your FMV determination

Here are some suggestions to help you defend your FMV determinations.

Properly document donations. FMV of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.

Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Websites like Kelley blue book ( can help establish the value of your vehicle when you donate it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it.

Get an appraisal. If you sell a small business, collection, art, or capital asset make sure you have an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.

Keep copies of similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.

Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.

Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and amount paid for the item.

With proper planning, establishing the fair market value of an item sold or donated, can be done in a reasonably defendable way if ever challenged.