Health savings accounts (HSA) are tax-deductible savings plans, generally paired with the high deductible health insurance plan option. They allow you to save pre-tax money for unexpected future medical expenses, or retirement. Rather than pay for an insurance plan and not need the coverage, HSAs allow you to pay in at a chosen amount and the money is there when you do need it. The downside is, if you do require lots of medical services throughout the year, you will pay a lot to meet the high deductible first. HSAs are available to anyone regardless of income type.
With an HSA for an individual, you can contribute $3,400 per year. That amount increases to $6,750 for a family, with an additional $1,000 allowed to these amounts for anyone over 55. This money can be used to put braces on your child’s teeth in 3 years, or help meet your deductible this year. The money is available for present and future medical expenses.
This flexibility along with the fact that the money rolls over from year to year makes HSAs attractive to many. In the event of a career change, you can roll over your HSA to the next employer. Above and beyond these advantages are the tax savings to be realized with an HSA. The money you contribute to your HSA can be deducted, without being itemized, at tax time. As long as you spend the money for medical expenses, you are not taxed when utilizing the funds.
How can you take advantage of this deduction? A Form 8889 is used to report the HSA contributions to the IRS. The amount is then deducted from the adjustments to income section of your 1040. Contributions for the 2016 tax year include savings made between January 1, 2016, and April 15, 2017. Interest and dividend earnings on the HSA are federally tax-exempt and not included on your annual tax return.
For additional details on HSAs and their effect on your taxes, please contact our office or check out the IRS website.