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Taking Charge of your Pay Day: The Tax Savings Benefits of Health Savings Accounts (HSAs)

When we first bring up the idea of a Health Savings Account, we’re often met with reluctance. The general assumption seems to be that HSAs have too many stipulations and are too complicated to set up and maintain.  That may have been the case several years ago when Health Care Savings Accounts and Flexible Spending Accounts (similar with different rules to HSAs) were first used regularly.  Nowadays, HSAs are relatively simple to administer and provide a nice tax advantage for those that qualify.

What are the Qualifications?

According to IRS Publication 969, to be qualified for an HSA you must meet the following requirements:

  1. You are covered under a high deductible health plan* on the first day of the month;
  2. You have no other health coverage (exceptions apply);
  3. You aren’t enrolled in Medicare; and
  4. You cannot be claimed as a dependent on someone else’s 2018 tax return.

*In 2019, a high deductible health plan is a policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage.

What are the Benefits?

IRS Publication 969 outlines the following benefits of an HSA:

  • You can claim a tax deduction for contributions you make outside of your job, even if you don’t itemize your deductions on Schedule A (Form 1040).
  • Direct contributions to your HSA made by your employer or by you via payroll may also be nontaxable.
  • The contributions remain in your HSA until you use them and can be rolled over year-to-year indefinitely.
  • The interest or other earnings on the assets in the account are tax free.
  • Distributions will be tax-free if you used them to pay qualified medical expenses.
  • Distributions can be used to pay for COBRA insurance but not regular medical plan premiums.
  • An HSA is “portable.” It stays with you if you change employers or leave the work force.

For 2019, you can contribute up to $3,500 to an HSA if you have single coverage or up to $7,000 for family coverage in 2019. If you are 55 or older this year, you may contribute an additional $1,000. In most circumstances, your contributions are TAX-FREE.  For instance, if you earn $50,000 and contribute $5,000 to your HSA; only $45,000 will be included when calculating your taxable income.  It’s a win-win.

How Do I Open and Maintain an Account?

Health Savings Account can be opened at most banks and credit unions.  You simply open the HSA like you would a regular checking account. The account is owned by you, not your employer.

You may make regular monthly contributions or simply contribute when you know you have a medical bill to pay.  There is no required contribution schedule.

Like any account, we recommend checking in periodically to make sure the account activity is accurate. Also, keep all medical expense receipts in the event the IRS wants to review the activity.

How Do I Get the Money Out of the HSA?

You may either pay medical bills directly out of your HSA using your account information for ACH payments or your debit card; OR you may reimburse yourself by simply transferring funds from your HSA to your personal checking account at the same bank.

Be sure to report the deposit and withdrawal activity to the IRS via Form 8889 via your annual 1040 filing.

Want to Talk About it?

We have a lot of experience with Health Savings Accounts and have found them to be widely underutilized. If you qualify to use one, you should not give up the tax savings.  Please let us know if you want to learn more!

This is the second article in the Tax & Financial Planning Series “Taking Charge of Your Pay Day”. Stay tuned for the next topic.

-Emily Agosto, CPA