Tax savings from an HSA
An HSA is a type of savings account that can help you pay for medical expenses, which will also provide the benefit of reducing your taxes.
Fortunately, you can take advantage of the tax savings immediately.
With an HSA you receive money that is tax-free.
One of the best benefits of an HSA is that when you make a contribution, you’re getting tax-free money.
Instead of receiving the money immediately when you get paid, the money goes into an HSA for you to spend on medical bills.
Another advantage of an HSA is that your money grows tax-free. An HSA is a health savings account, so it is similar to a savings account and earns interest. But unlike a regular savings account where interest earned will be counted as taxable income, your HSA contributions can grow without the interest being taxable.
There’s another benefit of an HSA. When you turn 65, your HSA will become like a traditional IRA. You can withdraw funds from your HSA for anything you’d like, not just qualified medical expenses. Although you will have to pay taxes on those funds when you do. However, you may be in a lower tax bracket when you are retired.
With an HSA, not only are you setting aside money for current medical expenses but you’re also able to save for future health care costs. Whether it’s this year or 10 years from now, when the time comes to make a withdrawal you can take that money out tax-free as long as it’s for a qualified medical expense.
If you have a high deductible health plan (HDHP), you should consider opening a health savings account (HSA).
Using and HSA is like a savings account that you can use for qualified medical expenses. It can pay for everything from motion sickness medicine to band aids.
There are only 3 requirements for having an HSA.
- You need to be enrolled in an HDHP. That means your health insurance plan has a minimum deductible of $1,400 for single coverage or $2,800 for family (in 2020). Additionally, it means a maximum annual out-of-pocket expense of $6,900 for individuals and $13,800 for families. This includes medical expenditures like deductibles, coinsurance, and copayments, but not your premium.
- You can’t be enrolled in Medicare.
- You must be 18 years or older and no one can claim you as a dependent on their tax return.
The maximum annual HSA contribution that you can make as an individual is $3,550. For families, that number goes up to $7,100. If you’re 55 and older (and not enrolled in Medicare), you can also make an annual “catch-up contribution” of $1,000. (These are the limits in 2020)
As an example, if you have a family and you contribute $7,100 and are in the 22% tax bracket, you will save $1,562 in taxes.
If you’re self-employed, you contribute pretax and it won’t count toward your taxable income.
If you own a corporation, your employer (your corporation) takes money out of your paycheck which reduces your taxable income. However, you still get to use the money to pay medical bill and it’s tax-free.
An HSA is easy to set up and a great way to earn tax-free money if you qualify.
David Zubler has an accounting degree and computer science degree and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990. David Zubler is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at email@example.com.