The Tax Benefits of Health Savings Accounts

If you have a high-deductible health insurance plan, you should have a Health Savings Account (HSA) to save for those medical expenses that come out of your pocket. Not only is it a good idea to save for the unexpected, the tax benefits of Health Savings Accounts are pretty compelling, if you qualify.

Health PigTo qualify, you must be enrolled in a high-deductible insurance plan.  What’s considered high-deductible? For 2013, the insurance plan must have a deductible of at least $1,200 for self-only coverage and $2,400 for the family.  You also cannot be covered by another health insurance plan (such as a PPO provided by your spouse’s employer).

What’s so good about them?  Unlike flexible spending accounts that operate on the “use it or lose it” principal, you can accumulate funds in HSAs over a period of years without losing your unspent balance.

A tax-deductible savings plan

HSAs are tax-deductible savings plans, and if you have an employer that offers one, you can deduct the funds from your check with pre-tax dollars.  Another tax benefit of Health Savings Accounts: Your HSA can also earn interest and dividends, all of which are tax-exempt at the federal level.   Finally, withdrawals from your HSA are tax-free as long as you use the funds for qualified medical expenses.

Qualified expenses include such things as your health insurance deductible, certain medical equipment, vision care, dental care and prescriptions, among others.  Keep in mind, though, that tax-free withdrawals are allowed only for prescription drugs.  Over-the-counter drugs do not qualify.

You can contribute up to $3,100 as an individual to your HSA in 2013.  Family contributions max out at $6,250.  If you are 55 or older at year end, you are entitled to make a catch-up contribution of an additional $1,000 into the HSA.

But plan carefully. Taking money out of your HSA for anything other than qualified medical expenses means you will have to pay income tax on the funds.  Additionally, you’ll get hit with a 20% non-qualified withdrawal penalty…ouch!

How to set up a Health Savings Account

So how do you set up an HSA if you don’t already have one?

Get your high deductible health insurance coverage.  Start 2013 off right with your health insurance coverage in place to qualify you for an HSA.

HSA Cash

Opening a Health Savings Account could put some extra cash in your pocket.

Set up your HSA as soon as you get your insurance coverage.  You can’t take tax-free withdrawals for medical expenses incurred prior to the account being established so it’s important to get the HSA set up as soon as possible.  Many financial institutions offer options for HSAs, so shop around to find the best return on your money.  If you are an employee, check with your Human Resources department to find out how to enroll in the company plan.

Make your first contribution.  You have until April 15th of the following calendar year to make a contribution for the previous year.
Contact your tax preparer to help you calculate your deductible HSA contributions for the year.  This will be reported on Form 8889 of the 1040. For contributions, you will receive a Form 5498-SA from your insurance provider telling you how much you put in to the HSA during the year.

Sound complicated? Consider talking with a tax professional to help you figure out what’s best for your situation and how you can make the most of the tax benefits of Health Savings Accounts.

About Renee Daggett

Renee Daggett is the founder and President of Admin Books, Inc, a bookkeeping and tax firm. She is also the author of “Your Financial Flight Plan: Pilot Your Business To Profitability”. Renee lives her life with purpose and helps her clients find peace of mind as they achieve success in their businesses.

Comments

  1. We recently re-enrolled in an HSA, and one of the best plans for us was offered by HealthNet and involved us joining the California Farm Bureau (even though we’re not farmers). Sounded very odd to us at first, but ended up being a very straightforward process.

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