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January 13, 2007
Health Savings Accounts and Your Taxes
Health Savings Accounts have a "triple" tax advantage from a federal tax standpoint. Individuals receive full tax advantages for their Health Savings Accounts on their Federal Income Tax return (or through a salary reduction program in certain employer-sponsored settings) regardless of particular state's tax treatment of Health Savings Accounts.
In fact, only 4 states do not allow tax deductions for Health Savings Accounts... Alabama, California, New Jersey, and Wisconsin.
An account beneficiary may take an above-the-line deduction (i.e. the amounts may be used to determine the individual’s adjusted gross income before any itemized or standard deductions are considered) for contributions made to an HSA during any month of the individual’s taxable year that the individual is eligible. The permitted deduction cannot exceed the sum of the “monthly limitations” for such months. Here are the 2007 limits:
- For those with single coverage, the maximum amount is $2,850.
- For those with family coverage, the maximum amount is $5,650.
Funds in an HSA grow on a tax-deferred basis, and distributions from an HSA are tax-free so long as the funds are used for qualified (as defined by Section 213d of the IRC) health care expenses.
How does state tax treatment of Health Savings Accounts differ from federal tax treatment?
HSAs (and the enabling legislation) are federal. As a federal program, each state decides whether to: a) comply with the federal guidelines, or; b) establish their own state guidelines regarding the tax treatment of HSAs. As a result, some income that may be tax-free at the federal level may not be tax-free at the state level.
Many states harmonize their tax treatment with the federal government. Those states include Arizona, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Indiana, Kansas, Kentucky, Louisiana, Maryland, Missouri, Mississippi, New York, Montana, Nebraska, New Mexico, Oklahoma, North Carolina, North Dakota, Pennsylvania, South Carolina, Oregon, Rhode Island, Virginia, Utah and Vermont.
Other states, however, treat HSAs differently from the federal government, at least for tax purposes. The following states have indicated that legislation must be passed at the state level before HSAs receive a tax benefit at the state level: Alabama, California, New Jersey, and Wisconsin. New Hampshire and Tennessee do not tax income, but do tax dividends and interest.
See where all the states stand on the Health Savings Account issue: http://www.health--savings--accounts.com/state-income-tax.htm
Posted by Wiley Long at January 13, 2007 11:24 AM