Would you like to enjoy tax savings while putting money aside for your healthcare costs, both now and in retirement?
Then you may want to set up a Health Savings Account (HSA), which you can use to pay medical expenses that health insurance doesn’t cover.
HSAs should not be confused with health care flexible spending accounts (FSAs). With an FSA, any unused contributions above $500 are forfeited at the end of the year. With an HSA, however, unused funds roll over every year and stay in your account until you withdraw the money.
HSA contributions are tax-deductible or, if you set up a payroll deduction, are made pretax. Any interest earned on the money is tax-free, too.
Who Can Have an HSA?
You can set up an HSA if you:
- Have a High Deductible Health Plan (HDHP).
- Have a deductible of between $1,300 and $6,550 for an individual, or between $2,600 and $13,100 for a family
- Do not have other health insurance
- Are not enrolled in Medicare. (However, you can have separate dental coverage, vision coverage, long-term care coverage, disability insurance, and/or workers’ compensation insurance.)
You use the money you put aside in the HSA to cover qualifying medical expenses that you have to pay to meet your deductible. Because the money is tax-free, you’ll save money in the long run.
The amount you can contribute to an HSA varies depending on how old you are, your type of HDHP insurance, and when you became eligible for the HSA.
How Do I Use My HSA?
You can withdraw money from your HSA to cover a “qualifying medical expense.” Generally, this is any expense that your health insurance doesn’t cover or reimburse you for, or that would qualify as a medical/dental expense deduction on your tax return. Examples may include copays or costs for specialists, lab work, hospital procedures, operating room fees, dental cleanings, dental treatments, and dental surgery.
The IRS website has more information about what constitutes a qualifying medical expense. (Keep in mind, though, that once you use your HSA to pay a qualifying medical expense, you can no longer claim that expense as a deduction on your tax return.)
Save receipts for any expense you pay out of your HSA account, as well as all of your HSA account statements. You may need them if the IRS ever has a question about your HSA distributions.
If you take money out of your HSA for anything other than a qualifying medical expense before age 65, you’ll not only have to pay taxes on the money but also face a 20% penalty. Once you turn 65, you can withdraw money for any reason without paying the penalty, but you’ll still have to pay income taxes on the distribution.
HSAs and Your Taxes
Report your HSA contributions to the IRS using Form 8889. Any contributions over the annual contribution limits are not tax-deductible. You can make contributions for a tax year until that year’s tax filing deadline; in other words, you have until April 15, 2020, to make contributions for 2019.
HSAs generally have the greatest tax benefits for people who don’t have a lot of medical expenses. If you fall into this group, they allow you to reduce your tax bite upfront instead of itemizing your medical deductions on your tax return (which generally requires a lot of deductions).
In addition to lowering your taxes, HSAs can be an investment tool to help you put aside money for medical expenses after you retire. Many experts suggest contributing the maximum amount to your HSA annually even if you don’t expect to spend it that year. The money appreciates tax-free over the long term, and you get a current deduction—the best of both worlds. You can fund an HSA quickly by making a tax-free rollover from an IRA.
More than 140 million people file taxes in the U.S. each year, and more than half use a professional tax preparer. These consumers are served each year at Liberty Tax locations across the country – and our numbers are growing. Opening a tax franchise doesn’t require tax expertise. Liberty’s proven system provides the tools and makes the tax business a great business opportunity. Since 1997, Liberty Tax has grown to more than 4,300 offices in the United States and Canada. Find out more about the Liberty Tax opportunity at LibertyTaxFranchise.com.