More than half of the people who have a Flexible Spending Account (FSA) available for medical costs as an employee benefit don't take advantage of it. That's a costly mistake. While medical expenses are theoretically deductible, in practice they seldom are because a person needs very high medical expenses to meet the cutoff. A FSA saves you taxes from the first dollar.
I've had a FSA for at least 15 years, and I've saved at least $500 with it every year.
Why do so many people pass by this great opportunity? Because they fear their "Use it or lose it" nature. Contributions must be chosen before the beginning of the year. If the person's actual expenses are less than the estimate, the excess is forfeited. Yet, except in very unusual circumstances, this should not occur. And even if a small amount is lost, chances are that the person has still saved money.
The basic idea is to base your estimate on predictable expenses that will recur this year. You know that you need an annual check-up, take two prescriptions regularly, and buy prescription eyeglasses or contacts each year. If those have totalled $1500 in 2009, set a bit less aside for next year to be conservative, say $1350.
Using this technique, I've had a FSA every year for the last 15, and NEVER yet forfeited anything!
If you get a happy surprise and costs are lower than expected, you need to focus on the savings you had rather than the small amount forfeited. Using our example above, assume that at the end of the year you had $100 left in the account and lost it. The $1350 that was set aside would have given you a tax savings of somewhere between $270 and $450. So you are still ahead in using the FSA. The higher your medical expenses, the more you save.
So fill out that election right now!