What are the tax benefits of making contributions to a Flexible Spending Account?

Making contributions to a Flexible Spending Account (FSA) provides the benefit of reducing taxable income. When employees contribute to an FSA, these contributions are made with pre-tax dollars, meaning they lower the amount of income that is subject to federal income taxes. This results in a lower overall taxable income, which in turn can lead to tax savings during the year the contributions are made.

For example, if an individual earns $50,000 and contributes $2,000 to their FSA, their taxable income is effectively reduced to $48,000. This reduction can lead to lower tax liability, depending on the individual's tax bracket.

Other options do not accurately describe the tax benefits associated with an FSA in the same manner. The option discussing deferring taxes until withdrawal is more characteristic of a retirement account, not an FSA. Increasing overall tax credits or eliminating tax liability is not directly related to FSA contributions and does not align with how FSAs function regarding taxes.