• Reduce your federal income taxes.  Regardless of how your income was earned, any money you deposit into your Health Savings Account is considered an "above-the-line" deduction, giving you a 100% write-off against adjusted gross income.
• Reduce your adjusted gross income, helping you to qualify for other lucrative tax breaks tied to overall income.  By reducing your adjusted gross income, you may also qualify for additional tax breaks.  For instance, the child tax credit of $1,000 begins to be phased out once a family's adjusted gross income exceeds $110,000.  Keep your AGI below this number, and you maintain the full $1,000 tax credit per child.
• Reduce your state income taxes.  Federal adjusted gross income is also the starting point for most state tax assessments, so saving on your state income tax bill is possible as well.  Find detailed information on our HSA state income tax page.
• Tax-deferred growth. Like funds in an IRA, the money in your account grows free from federal taxes.  You do have to pay taxes if the money is withdrawn for non-medical expenses, but there is no penalty if you are over 65 years old.
• Pay for dental expenses with pre-tax dollars.  Dental expenses from checkups and cleanings, to braces, to toothpaste, can all be paid for with pre-tax dollars from your HSA account.  You may even purchase prepaid dental plans with funds from your HSA account.  See our Low cost dental plans.
• Pay for vision care with pre-tax dollars.  You can use HSA funds to pay for checkups, glasses, contact lenses, prescription sunglasses, cleaning fluids, and other expenses related to your eye care.  View the list of HSA qualified expenses.
• Pay for alternative care with pre-tax dollars.  Health insurance doesn't typically pay for treatments like chiropractic, acupuncture, homeopathy, ayurvedic medicine, herbal medicine, various forms of "energy" healing, faith healing, or any number of other so-called alternative treatments.  One of the advantages of Health Savings Accounts is that the individual consumer has the right to choose their source of medical care, instead of that decision being made by an insurance company or HMO.  Therefore, there are very few restrictions on the type of treatment you choose.
• Pay Medicare expenses with pre-tax dollars.  When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare.  If you have retiree health benefits through a former employer, you can also use your HSA to pay for your share of retiree medical insurance premiums.  The one expense you cannot use your account for is to purchase a Medicare supplemental insurance or "Medigap" policy.
• Pay for long-term care insurance with pre-tax dollars.  Long-term care premiums can be paid for from your HSA, up to $260 for those under age 40, $490 if you're between 41 and 50 years, and up to $2,600 if you're 61 years or older. 

A Health Savings Account (HSA) enables anyone with a qualifying high-deductible health insurance plan to shelter up to $6,150 from federal income taxes.  By reducing your adjustable gross income, enabling you to pay for medical expenses with pre-tax income, and through tax-deferred growth, HSAs can reduce your income taxes.

Either way, this will immediately reduce your federal income tax due for the year.  Most states also allow the same deduction for state income taxes.

*maximum for a family.  Individuals over age 55 may deposit into their account and take a tax deduction of an additional $1,000.

In addition to being able to withdraw your money tax free to cover these types of expenses (which might otherwise be covered by a traditional low-deductible high-premium policy), you can use your HSA account to cover other costs that would not normally be covered by a health insurance policy.

These include:

• Dental expenses.  Individuals can typically only purchase dental discount plans, or fairly expensive dental policies with a limited choice of dentists.  Coverage for braces is normally very limited.  However, any of these medically necessary procedures can be paid for from your HSA account.
• Mental therapy.  This includes the charges of psychiatrists, psychologists, psychoanalysts, and psychotherapists.
• Physical therapy.  This could include hydrotherapy, chiropractor services, or medical massage therapy.
• Alternative treatments.  This could include acupuncture, Ayurvedic Medicine, aromatherapy, homeopathy, Traditional Chinese Medicine (TCM), nutritional consulting, or even healing services provided by a Christian Science Practitioner or other type healer.
• Transportation and lodging expenses, when related to health care
• Charges incurred as part of a preventive health program.  This could include vaccines, blood tests, metabolism tests, and other lab tests, and even fees paid to a health institute or vitamins if prescribed by a doctor.
• Nonprescription medications, such as aspirin or cough syrup (these will no longer be considered qualified expenses after January 1, 2011)
• Special fees incurred by handicapped individuals, including wheelchairs, telephone or TV equipment to assist the hard-of-hearing, the cost and care of guide dogs, or special school costs for the handicapped
• Maternity expenses that are not covered by your health insurance policy
• Insurance premiums to pay for qualified long-term care (See our Long Term Care page for more information.)

Also note that the HSA account can be used to pay these expenses for any spouse or dependent member of the family including same sex and domestic partners,even if they are not covered under the insurance policy.

More complete information can be seen on our HSA Qualified Expenses page.

Below is an example comparing how much a typical Non-HSA plan might cost, compared to a typical HSA plan.  This example is based on the average health insurance premium of an individual with a family of four living in a metropolitan area, covered medical expenses totaling $1,500, and $550 in expenses for dental care, contacts and eyeglasses.  This shows what would happen if the HSA holder is in a 28% federal tax bracket and 5% state tax bracket, and deposits $6,150, the maximum contribution allowed, into his HSA.

This example is based on the average health insurance premium of an individual with a family of four living in a metropolitan area, covered medical expenses totaling $1,500, and $550 in expenses for dental care, contacts and eyeglasses.  Health insurance premiums vary substantially based on age, geographic location and other variables.  Federal tax savings calculations assume that contributions are deducted from federal taxes.  Withdrawals for nonqualified expenses prior to the age of Medicare eligibility are subject to a 10% penalty by the IRS.

Note: In addition to the tax and premiums savings shown above, self-employed individuals are also eligible to deduct 100% of their health insurance premiums from their federal income tax.

* Your rate may vary.  Assumes a 28% federal tax bracket and 5% state tax bracket on deposit of $6,150.  Most states allow for state tax deductions on HSAs.  Use the Federal Tax Table below to determine your marginal Federal tax rate based on your “taxable” income. 

2011 Federal Tax Rate Schedules Singles Married Filing Jointly or Qualifying Widow(er) Married Filing Separately Head of Household

A chart showing the actual savings on Federal income taxes, based on income level and HSA contribution amounts, can be seen on our HSA Tax Savings page.  You can also use our HSA Tax Savings Calculator to calculate the tax savings for your own particular situation.

HSA for America and its affiliates are not engaged in rendering tax, investment or legal advice.  Federal and state tax regulations are subject to change.  If tax, investment or legal advice is required, seek the services of a licensed professional.  If you are looking for a CPA familiar with health savings accounts, please visit our CPA Resources page.