Tuesday, April 19, 2016

Health Savings Account Tax Trick

FROM FORBES.COM

A health savings account is a powerful tax tool. If you have a high deductible health insurance plan, you can contribute to an HSA every year–up until the month you start Medicare. And a really handy feature lets you make contributions for the prior tax year (like with Individual Retirement Account contributions) up until tax day. That lets taxpayers tweak their 2015 income (and taxes) through today. When you see how it can help you (examples below), it should get you motivated to start planning early for 2016. That’s all the more important, now that taxes and healthcare are more entwined than ever.

The idea is that you contribute to a health savings account to lower your adjusted gross income and get other tax breaks. It’s a lot like making last minute retirement contributions. “You can still use it as a tax planning tool when you do your taxes,” says Laurie Ziegler, an enrolled agent in Saukville, Wisc.

Ziegler had one client make a $500 contribution to a traditional Individual Retirement Account to lower her AGI, and that saved her over $1,000. Her income was coming in at a level that she would have otherwise owed back the premium tax credit for health insurance she bought on the federal marketplace.
Here’s how HSA contributions can have a similar impact. Ziegler just advised a couple in their 60s to max out the husband’s health savings account for 2015 (he has contributed the maximum $6,650 for family coverage, plus a $1,000 catch-up contribution–that’s allowed if you’re 55 or older). His wife fell last year, and had outsized out-of-pocket hospital rehabilitation bills of over $10,000. The couple paid the bills out-of-pocket and made the HSA contributions for future medical expenses. The HSA contributions are deducted above-the-line, lowering their adjusted gross income. By maxing out the HSA, they were able to deduct more of their out-of-pocket medical expenses. (You can deduct medical expenses only to the extent they exceed 10% of your adjusted gross income; for taxpayers 65 and older, it’s a 7.5% floor through 2016. Here’s how to score the medical expenses deduction.)

The HSA contributions can help increase the amount of other Schedule A deductions as well like non-reimbursed employee expenses and investment and tax preparation fees.

A health savings account is not a use-it-or-lose-it account like a healthcare flexible spending account; rather, it’s yours to keep, even if you change employers. You get the tax break going in, the money you contribute grows tax-free, and you can withdraw it at any time to cover out-of-pocket medical expenses, including deductibles. It also includes COBRA, Medicare and long-term care premiums, so it’s a great way to build up triple tax-free savings for retirement healthcare needs.

HSAs make sense no matter your age. Children can be covered under their parents’ health plan until age 26. If your adult child is covered but not your tax dependent, she can open her own HSA (with single, or if married, family coverage). For 2016, the maximum contribution for single coverage is $3,350 and for family coverage, it’s $6,750.