A. You cannot claim a “loss” or miscellaneous itemized deduction for unused, or forfeited, FSA monies.
The monies you contributed to your FSA, including the $1,000 that was forfeited, have already been deducted on your tax return. The total amount of wages that are paid into a Flexible Spending Account reduces the taxable federal wages reported in Box 1 of your Form W-2.
If you contributed $5,000 of your wages to the FSA then your “take home pay” and your federal taxable wages (and possibly state taxable wages) are reduced by $5,000. If your gross wages are $100,000 the W-2 will show $95,000. If you only submitted $4,000 in expenses then you have indeed suffered an economic loss of $1,000 – but it is income that was not taxed.
All is not lost. Under the new rules for Flexible Spending Accounts you have until March 15th of 2009 to submit expenses against FSA monies contributed for tax year 2008 – if your plan so permits. This applies to both medical expense and dependent care FSAs.