A flexible spending account lets you set aside pre-tax money from your paycheck for specific expenses. The health FSA covers medical, dental, and vision costs, including copays, prescriptions, glasses, and many over-the-counter items. The dependent-care FSA covers daycare, preschool, and after-school care for children under 13 or for dependent adults. The IRS sets an annual cap of a few thousand dollars for each type, and your employer may set a lower one.
The tax saving is real. Putting $3,000 into a health FSA saves about $720 of income tax for someone in the 24% bracket plus about $230 of Social Security and Medicare tax, roughly $950 for money you would have spent anyway.
The catch is use-it-or-lose-it. Money not spent by the end of the plan year is forfeited, apart from a small carryover or a short grace period if your employer offers one. That makes the right contribution the amount you are confident you will spend, not the maximum. Dependent-care FSAs have no carryover at all.
An FSA and an HSA are different things. You cannot contribute to a health FSA and an HSA in the same year unless the FSA is a limited-purpose one covering only dental and vision. The common mistake is choosing an FSA out of habit when a high-deductible plan with an HSA would save more and never expire. The second is overestimating spending and losing the balance in December.