Do You Benefit from a Health Savings Account?
By Bobby Hoffman
If your 2015 health plan has a deductible of at least $1,300 ($2,600 for families) and a maximum out-of-pocket threshold of no more than $6,400 ($12,900 for families); you can benefit from a Health Savings Account.
So what is a Health Savings Account (commonly referred to as HSA)? An HSA is essentially a savings account created from your earnings, tax free, that can be set up as either a specific trust or custodial account.
HSAs were created to allow individuals enrolled in high-deductible health plans to pay for current and future medical expenses from pre-tax income. This makes an HSA a tax advantaged account since funds contributed to the account are excluded from a taxpayer’s gross income, and such funds grow tax free in the account; provided that, distributions from the account are used solely to pay for “qualified medical expenses.”
So, what are “qualified medical expenses?” qualified medical expenses include, but are not limited to, costs of diagnosis, cure, treatment, or prevention of disease, as well as services rendered by physicians, surgeons, dentists and other medical practitioners and the equipment and supplies associated with such treatments. Though qualified medical expenses may encompass a broad spectrum of medical expenditures, HSA funds may not be used for over-the-counter drugs. HSA participants are required to report deposit and withdrawal information on their annual tax return as well as retain receipts for proof of expenses. Withdrawals from an HSA account for anything other than qualified medical expenses will be subject to income taxes and a 20% penalty. However, this penalty is waived once an individual reaches the age of 65, becomes disabled or dies.
But, why can’t I just itemize medical expenses? Medical expenses may only be an itemized deduction to the extent they exceed 10% of a taxpayer’s adjusted gross income. Therefore, most people’s general medical expenses for healthcare do not meet this threshold. HSAs are the only alternative to achieving tax savings for medical expenses. Note, medical expenses paid for with distributions from an HSA are not eligible to be taken as an itemized deduction.
Are there any limitations to an HSA? Yes, for those individuals with a qualifying health plan, annual contributions to an HSA are limited to $3,350 for individuals ($6,650 for families) for 2015. However, individuals age 55 or older may make an additional $1,000 contribution, if they are not yet enrolled in Medicare. Once a taxpayer becomes eligible for Medicare and is enrolled, either automatically or manually, they become ineligible to contribute to an HSA but may still use their existing HSA funds. Also, any taxpayer with a qualifying health plan can have an HSA without any adjusted gross income limitation. HSAs, unlike Flexible Spending Accounts, do not have a “use it or lose it” stipulation, so funds accumulated in the account may to be carried over year after year and may grow in the account, tax free, until needed.
You may not need the tax savings now, or have the medical expenses, but as you approach retirement, the “rainy day” HSA could come in very handy. If an individual is eligible for an HSA because of the nature of their health plan, creating such an account is an excellent planning technique.
For more information regarding this or any other tax matter, please contact us at 404-255-7400 or email us at info@hoffmanestatelaw.com.
