HEALTH SAVINGS ACCOUNTS SAVE TAXES

Medical expenses are deductible as an itemized deduction and only to the extent that they exceed 7.5% of your adjusted gross income (AGI).  For most of us that means that none of our medical expenses are going to produce any tax benefits unless we have had a really bad year – either very little income or a lot of medical expenses.

A Health Saving Account (HSA) is a special type of bank account that allows individuals with a high-deductible health plan to put money aside for medical expenses.  Deposits to the account are an above-the-line income tax deduction.  That means the deduction is available whether you itemize or not.  There is no 7.5% of AGI threshold to overcome like traditional medical expense deductions.

In order to open an HSA you must have a high-deductible health insurance plan.  Because these plans require the participants to pay a higher deductible than other plans, premiums are frequently lower.  Once you have a high-deductible health plan you are eligible to open an HSA.  Money you put in your HSA is tax deductible in the current year up to the limit of $3,100 for plans covering single persons and $6,250 for plans covering families.  If your are at least age 55 by the end of the year you can contribute an extra $1,000.

HSAs are treated similar to an Individual Retirement Account (IRA).  The earnings in the account grow tax-free.  Distributions from the account to pay for qualified medical expenses are excluded from your taxable income.  This is a great tax benefit!  You get a deduction when the money goes in and do not have to include the distributions in your income when you tax it out.  Like an IRA you can make contributions to an HSA up to the unextended due date of your tax return.  For 2011 tax returns you can make contributions up to April 17, 2012.  To take advantage of an HSA for 2011 the plan had to be in existence during the year.

It get better.  Even if you have a plan that just covers yourself, qualified medical expenses include amounts paid for your spouse or dependents.  You do not have to take the money out of the HSA at any time during your life.   There are no required minimum distributions.

Many HSA owners only put money in their account only when they have a medical expense to pay.  Rather than using the HSA as a vehicle for tax-deferred savings they use it to make their current medical expenses deductible above-the-line.  Generally, medical expenses are paid directly from the HSA, but they can be reimbursed.

Amounts taken out of an HSA that are not used for qualified medical expenses must be included in income and are subject to a 10% penalty (20% after 2010).

If you would like more information about taking advantage of the tax benefits associated with a Health Savings Account contact one of the tax professionals at Seid & Company, CPAs.