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Charitable FSAs: A Proposal to Combine Healthcare and Charitable Giving Tax Provisions

I just had a thought about trying to use my unused FSA contributions for charitable giving. I did a quick Internet search came up with an excellent article by Adam Chodorow that provides great insight and discussion about combining these two tax advantaged provisions. It's definitely an idea worth sharing. The following thoughts are Adam Chodorow's words, which are publicly available at: http://lawreview.byu.edu/articles/1346788491_03chodorow.fin.pdf

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Charitable FSAs: A Proposal to Combine Healthcare
and Charitable Giving Tax Provisions

By Adam Chodorow
10/15/2011

[Overview]

This Article considers two unrelated tax provisions—health care Flexible Spending Accounts (FSAs) and the charitable deduction. FSAs permit eligible taxpayers to set income aside tax-free to use for medical expenses. However, these accounts have a “use-it-or-lose-it” feature that discourages participation and creates incentives for unnecessary spending at year-end. The charitable deduction is available only to those who itemize their deductions, thus negating the incentive to give for the 65% of taxpayers who take the standard deduction. Prior attempts to fix these provisions separately—allowing taxpayers to roll over unused FSA amounts to the next year and moving some or all of the charitable deduction “above the line”—have failed.

I propose combining the two provisions by allowing taxpayers to donate unused FSA amounts to charity. Doing so would lower a key impediment to participation in FSAs while giving a functional above-the-line deduction (and relief from payroll taxes) to those who donate through this mechanism. Not only would this reform increase the efficacy of both provisions, but it should also avoid many of the pitfalls of prior stand-alone reform efforts.