Health Savings Accounts Can Mean Big Savings for Consumers
Concerned about the high cost of healthcare? Worried that your
insurance doesn't cover all your costs? Fortunately, a partial
solution may be just around the corner. Since January 2004,
taxpayers have had a tax savings tool called Health Savings
Accounts, or HSAs. These HSAs may solve many of your healthcare
cost problems.
How an HSA Works
In a nutshell, HSAs work like this. You buy a specific type of
major medical, or catastrophic coverage, insurance called a High
Deductible Health Plan. (This special HSA-compatible insurance
is also known by the acronym HDHP.) Then, you annually
contribute up to roughly $5,100 for a family and up to $2,600
for an individual--to a special health savings account.
Mote that slightly higher deductions are available to taxpayers
over the age of 55. Also, annual deductions are indexed for
inflation.
How You Save Taxes with HSAs
HSAs work because you get a tax deduction for the money you
contribute to the health savings account. However, as long you
spend the money in the account for eligible healthcare
expenses--pretty much anything reasonable--you aren't taxed when
you withdraw the money. Note that HSAs deductions are not
limited by taxpayer incomes.
In effect, the HSA makes all or most of your uncovered
healthcare expenses fully deductible. This is a big deal because
for most people, healthcare expenses are not deductible.
Just to put the value of an HSA into perspective, a family can
save from $500 to as much as $1750 annually in income taxes by
using one of these accounts. The final savings, predictably,
depend on family income and the state where the family lives.
One other thing. Don't confuse HSAs with the old style Flexible
Spending Accounts, or FSAs. With FSAs, you lost the money you
didn't spend by the end of the year. With HSAs, you don't lose
the money. The unused balance just carries forward to the next
year.
Aren't Medical Expenses a Tax Deduction Anyway?
No, not really. For most people medical expenses are not a tax
deduction. Here's why. Healthcare expenses do count as an
itemized deduction for people who don't use the standard
deduction. However, only the portions of one's healthcare costs
that exceed 7.5% of adjusted gross income get deducted. That
means that most people never get to use their healthcare costs
as tax deductions because their healthcare costs don't cross the
7.5% threshold.
Another Benefit: HSAs May Also Save Premiums
HSAs sometimes produce another economic benefit. The HDHP
insurance itself may save people money because they buy less
insurance. This is especially true for people who aren't already
using major medical insurance.
How to Set Up a Health Savings Account
HSA accounts aren't difficult to set up. Essentially, you do
just two things. (1) Get medical insurance that qualifies as an
HDHP, and (2) Open an HSA account with a bank that offers HSAs.
Your current medical insurance provider is a good place to start
your search for HDHP insurance. You can also check with your
state's Blue Cross or Blue Shield insurer.
Three Warnings about HSAs
For what it's worth, I am now using an HSA myself. (I got my
HDHP from Premera Blue Cross and use an HSA account from HSA
Bank.) But let me also share three caveats: First, obviously,
you never want to cancel one insurance policy until you're sure
you have a replacement policy. Second, you do need to be careful
about the fees associated with the HSA "bank account," so shop
around. Third, if you withdraw money from an HSA for something
other than a valid medical expense, the withdrawal is taxable
and subject to a 10% penalty.
About the author:
Bellevue-Redmond CPA
Stephen L. Nelson is the author of both Quicken for Dummies
and QuickBooks for Dummies and an adjunct tax professor for
Golden Gate University's graduate tax school.
