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July 10, 2009
Health Savings Account Create Tax Advantage
Health Savings Accounts are simply tax favored savings accounts which may be opened when an individual enrolls in a high deductible health plan.
The combination of an HSA qualified health insurance plan and a Health Savings Accounts gives everyone more affordable health insurance coverage and a savings account that offers significant tax advantages.
Any money deposited in a Health Savings Account will result in a tax deduction. Quite simply, any money deposited will reduce your federal income taxes. Just like an IRA, this deduction is an "above the line" deduction which means you get a 100% write-off against your adjusted gross income.
State laws differ, but most honor the adjustment to gross income which results from the deduction of funds deposited in a qualified Health Savings Account. Connecticut does honor the adjusted gross income as reported after deducting the funds deposited in an HSA. Be sure and only purchase a plan from an insurance company which is properly licensed in Connecticut.
The money you deposit in a Health Savings Account earns tax deferred interest. Unlike a Flexible Spending Account {FSA}, the money deposited in an HSA rolls over year after year. Many people confuse the rules governing Health Savings Accounts with Flexible Spending Accounts, FSAs. Money deposited in a Flexible Spending Account is "use it or lose it." That is not the case with a Health Savings Account.
The IRS sets the maximum contribution which can be made in any year to a Health Savings Account, For an individual in 2009, the maximum contribution is $3000 and for a family, $5800. The IRS adjusts these contribution levels every year.
The money you spend from your Health Savings Account, if used for qualified medical expenses, is tax free.
Funds deposited in your Health Savings Account may be used for any qualified medical expense, as defined by the IRS and remain tax-free. Qualified medical expenses include items that may not be covered by your health insurance plan. Dental costs, eye glasses and over-the-counter medications, are some of the items that can be paid for using the funds in you HSA.
Penalties for using the HSA funds will only accrue if the money is used for a non-qualified expense. If you withdraw the funds to pay for a new TV or a vacation, for instance, you will be required to declare that amount as earned income and pay a 10% penalty.
Persons who have opened a qualified HSA will receive a Form 5498-SA from their HSA bank, credit union or other administrator. The form will report the amount that you, or your employer or anyone else, contributed to your HSA. It also reports any distributions from your HSA. As long as these distributions were used to pay for qualified medical expenses, you will be able to deduct all the money deposited in your Health Savings Account, even if you spent all the money.
Taxpayers should complete Form 8889 and attach it to their Form 1040. Report the HSA deduction on line 25 of Form 1040. You must file this Form 8889 even if all the contribution were made by an employer or anyone else. Anyone can contribute to your Health Savings Account but no one can contribute a total of more than the yearly maximum set by the IRS .
Unfortunately, Congress is considering cutting back on the tax benefits associated with Health Savings Accounts. No final decision has been made, and until it is, Health Savings Accounts remain an excellent option for obtaining more affordable health insurance and getting a tax advantage as well.
Posted by Wiley Long at July 10, 2009 01:33 AM