Health Savings Account Deductions
Planning for healthcare costs is very important considering the high cost of medical treatments. As such it becomes imperative to opt for health insurance plans which cover the medical costs whenever they incur. However, health insurance plans have deductibles and if you have a High Deductible Health Plan (HDHP) your pockets would bear a very heavy burden. To combat these High Deductible Health Plans, a Health Savings Account comes to our rescue.
What is a Health Savings Account?
A Health Savings Account is like a tax-free savings account where you and your employer can contribute money. This money can then be used to pay such qualifying medical expenses which are excluded by your health insurance plan.
What are the features of a Health Savings Account (HSA)?
The account has various features which are as follows:
- You can set up the Health Savings Account with a qualified HSA trustee.
- You should have a HDHP to qualify for the HSA.
- Contributions to the HSA can be made by you, your employer, or both. If your HDHP covers only you, the maximum annual contributions to the HSA account would be limited to $3400. If your family is also covered by your health plan, the annual contribution limit goes up to $6750. Individuals above 55 years of age can contribute an additional $1000 in excess of this limit. If you or your employer’s total contributions exceed the specified limits, a penalty of 6% would be levied.
- The contributions made to the HSA, by you or by your employer, are tax-free. They are deducted in the ‘adjustments to income’ section on the Income Tax Form 1040.
- If your HSA earns any interest, such interest is also tax-free.
The balance in the HSA should be used only to pay qualifying medical expenses. If the HSA is used for paying non-qualifying medical expenses a penalty of 20% would be charged. This penalty, however, would not be applicable if the individual is more than 65 years old, becomes disabled or dies.
If the money in the HSA is not utilized in any financial year, it is rolled over to the next year. This carries on every year and the cumulative balance also earns interest.
How to file HSA deductions?
Since HSA contributions qualify for tax exemptions, they can be availed as deductions. For your employer’s contributions it would be listed in box 12 of the Form W-2. Your total HSA contributions should be recorded in Form 8889 and the form should be attached to your Form 1040, i.e. your Income Tax Return and then you should file your taxes.