How to Save On Taxes With A Health Savings
You need to do some research on it and visit a
proper tax consultant, who can guide you on how to save on taxes with a health
savings account. You just need to know a few common facts that can help you
save a substantial amount of money.Health Savings Accounts Mean Big
If you are covered by a
high-deductible health insurance policy, you can set up a health savings
account. The amount that you remit on this account will guide you on how to
save on taxes. The amount is deducted before calculating your gross income.
Thus, you do not have to claim itemized deductions Schedule A of Form 1040. If
your employer makes the contribution to your health savings account, it is not
taxable to you.
You need to strategize on how to save on taxes. For the
year 2006, for example, in case of individual coverage, a high-deductible
policy is supposed to have an annual deductible of a minimum of $1,050. In case
of family coverage, it must have an annual deductible of a minimum of $2,100.
The yearly out-of-pocket expenditure is limited to $5,250 (individual) or
$10,500 (family). If you want to use the distributions from your health
insurance policy to pay medical insurance of your own, your spouses and
your dependents, the amount is not taxable. Medical expenses mean optical
care, dental care, expenditure on hospitals, physicians, drugs, and traditional
You can deduct the medical expenses from Schedule A of
Form 1040, even if you do not pay your medical expense from your health savings
account. If you are married and both of you have health insurance, special
rules apply to both of you. If only one of the spouses has a family health
insurance, both of them are considered to have family coverage. If both of them
have family health insurance but under separate plans, the law believes that
each spouse has a family policy with the lower deductible.
by Stephen L. Nelson, CPA
Health Savings Accounts Can Mean Big Savings for
Concerned about the high cost of healthcare? Worried that your
insurance doesn't cover all your costs? Fortunately, a partial solution may be
just around the corner. Since January 2004, taxpayers have had a tax savings
tool called Health Savings Accounts, or HSAs. These HSAs may solve many of your
healthcare cost problems.
How an HSA Works
In a nutshell, HSAs
work like this. You buy a specific type of major medical, or catastrophic
coverage, insurance called a High Deductible Health Plan. (This special
HSA-compatible insurance is also known by the acronym HDHP.) Then, you annually
contribute up to roughly $5,100 for a family and up to $2,600 for an
individual--to a special health savings account.
Mote that slightly
higher deductions are available to taxpayers over the age of 55. Also, annual
deductions are indexed for inflation.
How You Save Taxes with
HSAs work because you get a tax deduction for the money you
contribute to the health savings account. However, as long you spend the money
in the account for eligible healthcare expenses--pretty much anything
reasonable--you aren't taxed when you withdraw the money. Note that HSAs
deductions are not limited by taxpayer incomes.
In effect, the HSA makes
all or most of your uncovered healthcare expenses fully deductible. This is a
big deal because for most people, healthcare expenses are not
Just to put the value of an HSA into perspective, a family
can save from $500 to as much as $1750 annually in income taxes by using one of
these accounts. The final savings, predictably, depend on family income and the
state where the family lives.
One other thing. Don't confuse HSAs with
the old style Flexible Spending Accounts, or FSAs. With FSAs, you lost the
money you didn't spend by the end of the year. With HSAs, you don't lose the
money. The unused balance just carries forward to the next
Aren't Medical Expenses a Tax Deduction Anyway?
really. For most people medical expenses are not a tax deduction. Here's why.
Healthcare expenses do count as an itemized deduction for people who don't use
the standard deduction. However, only the portions of one's healthcare costs
that exceed 7.5% of adjusted gross income get deducted. That means that most
people never get to use their healthcare costs as tax deductions because their
healthcare costs don't cross the 7.5% threshold.
HSAs May Also Save Premiums
HSAs sometimes produce another economic
benefit. The HDHP insurance itself may save people money because they buy less
insurance. This is especially true for people who aren't already using major
How to Set Up a Health Savings
HSA accounts aren't difficult to set up. Essentially, you do
just two things. (1) Get medical insurance that qualifies as an HDHP, and (2)
Open an HSA account with a bank that offers HSAs. Your current medical
insurance provider is a good place to start your search for HDHP insurance. You
can also check with your state's Blue Cross or Blue Shield
Three Warnings about HSAs
For what it's worth, I
am now using an HSA myself. (I got my HDHP from Premera Blue Cross and use an
HSA account from HSA Bank.) But let me also share three caveats: First,
obviously, you never want to cancel one insurance policy until you're sure you
have a replacement policy. Second, you do need to be careful about the fees
associated with the HSA "bank account," so shop around. Third, if you withdraw
money from an HSA for something other than a valid medical expense, the
withdrawal is taxable and subject to a 10% penalty.