A Health Savings Account (HSA) represents an opportunity for eligible individuals to
lower their out-of-pocket health care costs and federal tax bill. Since most of us
would like to take advantage of every available tax break, now might be a good time
to consider an HSA, if eligible.
An HSA operates somewhat like a Flexible Spending Account (FSA) that employers offer
to their eligible employees. An FSA permits eligible employees to defer a portion of
their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical
expenses. However, unlike an FSA, whatever remains in the HSA at year end can be
carried over to the next year and beyond. In addition, there are no income phaseout
rules, so HSAs are available to high-earners and low-earners alike.
Naturally, there are a few requirements for obtaining the benefits of an HSA. The most
significant requirement is that an HSA is only available to an individual who carries
health insurance coverage with a relatively high annual deductible. For 2015, the
individual's health insurance coverage must come with at least a $1,300 deductible
for single coverage or $2,600 for family coverage. For many self-employed
individuals, small business owners, and employees of small and large companies alike,
these thresholds won't be a problem. In addition, it's okay if the insurance plan
doesn't impose any deductible for preventive care (such as annual checkups). Other
requirements for setting up an HSA are that an individual can't be eligible for
Medicare benefits or claimed as a dependent on another person's tax return.
Individuals who meet these requirements can make tax-deductible HSA contributions in
2015 of up to $3,350 for single coverage or $6,650 for family coverage. The
contribution for a particular tax year can be made as late as April 15 of the
following year. The deduction is claimed in arriving at adjusted gross income (the
number at the bottom of page 1 on your return). Thus, eligible individuals can
benefit whether they itemize or not. Unfortunately, however, the deduction doesn't
reduce a self-employed person's self-employment tax bill.
When an employer contributes to an employee's HSA, the contributions are exempt from
federal income, Social Security, Medicare, and unemployment taxes.
An account beneficiary who is age 55 or older by the end of the tax year for which the
HSA contribution is made may make a larger deductible (or excludible) contribution.
Specifically, the annual tax-deductible contribution limit is increased by $1,000.
An HSA can generally be set up at a bank, insurance company, or other institution the
IRS deems suitable. The HSA must be established exclusively for the purpose of paying
the account beneficiary's qualified medical expenses. These include uninsured medical
costs incurred for the account beneficiary, spouse, and dependents. However, for HSA
purposes, health insurance premiums don't qualify.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015