HSA Federal Tax Deductions

Disclaimer: 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.

Tax Advantages

Since they first became available in the beginning of 2004, HSA's have rapidly gained popularity, particularly among individuals and small businesses.  Here are 10 ways an HSA can offer tax advantages over traditional health insurance arrangements:

• 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 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  You do have to pay taxes if the money is withdrawn for non-medical expenses, but there is no penalty if you are over 65 years old.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.
  
  
• 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 for aspirin, bandages, cold medicine, and other household medical expenses with pre-tax dollars.  Virtually all expenses related to the treatment or prevention of a medical condition can be paid from your Health Savings Account.  View the list of HSA qualified expenses.
  
  
• 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 $5,800 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.

Tax Deductible Contributions

HSAs allow you to legally avoid federal income tax by saving 100% of the health plan's deductible, up to $2,900 for singles or $5,800* for families, into your HSA account.  Whatever you deposit into your account up to April 15, is an "above the line" tax deduction for the previous year's income taxes, meaning you get a federal income tax deduction for money you put in even if you don’t itemize deductions.  If your employer makes an HSA contribution for you, it is “excluded” from income, and not subject to any income tax or FICA.  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 in 2008.  Individuals over age 55 may deposit into their account and take a tax deduction of an additional $900.

Tax-subsidized Medical Expenses

Even though you have received a tax deduction by putting your money into this account, the money is still yours to spend tax free, as long as you spend it on qualified medical expenses.  Since you have a high-deductible plan, this would of course include any expenses you incur from going to the doctor, purchasing prescription drugs, or paying other expenses toward your deductible.  Once your deductible is met, the health insurance covers your medical expenses as defined in the policy.

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. 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
  
  
• 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

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

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

Premium and Tax Savings

Health Savings Accounts can help you save money on both your insurance premiums, and your income taxes. Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical plan that has a $500 deductible.  And there is no other investment that offers a tax deduction today along with a tax-deductible withdrawal tomorrow.  The savings from the lower premiums along with the tax-free deductions could be $5,000 or more every year.

• HSA Tax Savings Calculator

Let's see what you could save

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.