Today I want to talk about things that certain people can do between now and tax day to save tax on your last year’s return. It has to do with Health Savings Accounts (HSAs).
With the tax law changes over the last few years, most taxpayers now take the standard deduction. This limits the amount of tax deductions available for medical costs. That is why I like HSAs since you can take a deduction even if you take the standard deduction.
CAN ANYONE SET UP A HSA?
- Unfortunately no – you have to have to be covered under a high deductible health insurance plan. But the nice thing is that many employers are going with this high deductible option.
IF SOMEONE IS ELIGIBLE, HOW DOES THE TAX SAVINGS WORK IF IT IS NOT AN ITEMIZED DEDUCTION?
- You get a tax deduction for up to $7,300 for a family plan or $3,650 for a self only plan just by contributing this amount into your account. People 55 and older can contribute even more.
- You do not need to spend the money to get the deduction – all you have to do is put the funds into the account. It’s that easy.
I HAVE A CAFETERIA PLAN AT WORK, THIS IS HOW I CONTRIBUTE TO MINE.
- That is my favorite way to contribute since you will save income tax as well as SS and Med.
- You can also put money directly into your HSA account, but you only get an income tax ded for that.
- You can also do both as long as it does not go over the limit.
DO I NEED TO USE THE FUNDS BEFORE THE END OF THE YEAR?
- No. Unlike a FSA or flexible spending account – it is not use it or lose it.
IT’S ALSO EASY TO GET THE FUNDS OUT RIGHT?
- Yes. Since this is your own plan, you can go right to the bank and withdraw the funds to pay for a medical expense.
- Many banks also allow you to have a debit card.
DO I HAVE TO PAY FOR MEDICAL EXPENSES FROM THIS ACCOUNT?
- No and this is why I like HSAs so much. Stay with me here.
- You can actually pay for medical expenses personally and just accumulate those expenses.
- You can then reimburse yourself for them from the HSA in a later year. There is nothing that says that you need to pay for the expense from the HSA immediately.
- Waiting till a future year to reimburse yourself will allow the account to grow tax free since any income earned by the account is not taxable.
YES BUT THE ACCOUNT DOES NOT EARN VERY MUCH INTEREST.
- That is true, but I have clients who have put these funds into mutual funds and treat it like an IRA to get higher tax FREE earnings.
Be sure to talk to a tax professional if you have any questions about these helpful tips when dealing with a HSA.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
