Health Savings Accounts (HSA) allow taxpayers with qualifying health insurance coverage to make tax deductible contributions to fund their accounts to be used for medical expenses. Often, taxpayers without an HSA are not able to receive any tax benefit from their out-of-pocket medical expenses, as they’re required to reduce their medical expenses by a percentage of their income, and it’s only the amount leftover (if any) that they can benefit from deducting as an itemized deduction.
With an HSA, it doesn’t matter how high your income is, you’re able to deduct amounts you contribute to an HSA on your federal income tax return. This deduction is in the adjustment to income category to arrive at federal adjusted gross income (AGI) and is not an itemized deduction.
Eligibility Requirements: As mentioned above, in order to contribute to an HSA, you must have an HSA compatible health insurance plan. Compatible health plans often contain HSA in the name of the plan to indicate they are HSA compatible. If your plan does not contain HSA in the name, you should contact your health insurance company to inquire whether it is an HSA compatible plan. While many taxpayers are aware of the requirement for the health plan to have a high deductible, there are lesser known requirements that may make the health plan not HSA compatible.
Unlike a Flex Spending Account (FSA), HSAs are not “use it or lose it” accounts. The amounts you contribute to an HSA can stay in the account for any number of years.
Some HSA providers allow you to invest in mutual funds or index funds in the HSA account. Similar to a retirement plan, these earnings grow tax-free.
An HSA account is like a special kind of bank account that many different banks and other institutions offer.
Amounts paid from an HSA are tax-free if they are used for qualifying medical expenses.
There are the HSA contribution limits for the 2021 tax year (these amounts assume a full year of HSA compatible health coverage):
For a health plan that covers only one taxpayer (and not their family): $3,600
For family coverage: $7,200
Additionally, taxpayers that are 55 years of age or older at the end of the tax year are able to contribute an additional $1,000. Bringing the total annual contribution to $4,600 for self-only health coverage and $8,200 for family health coverage).
Due Date: Contributions to HSA accounts can be made as late as the due date for your tax return. Extensions do not extend this deadline. This means a contribution for the 2021 tax year can be made as late as April 15, 2022.
Additional details on HSAs can be found on the IRS website here: Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
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Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.