Taxpayers generally want to owe the IRS as little money as possible after filing their taxes. They use a number of different options to offset their tax liabilities and lower the amount that they are expected to pay to the government each year.
One of the newest ways to lower your tax burden involves opening a Health Savings Account, or HSA. An HSA offers you several unique benefits about which you should know before you prepare your tax return this year.
What is an Health Savings Account?A Health Savings Account is money that you put aside to help pay for medical expenses not covered by your health insurance policy. You can open an HSA on your own if you have a high-deductible health plan. You can also opt into an HSA that is sponsored by your employer.
When you open or opt into an employer-sponsored HSA, your contributions to it are tax-free. The IRS will not require you to claim those contributions as part of your income when you file your return.
If you are single, you and your employer can contribute up to $3350 combined each year without that money being taxed. If you are married, you and your employer can put in a combined tax-free total of $6650.
People aged 55 and older regardless of marital status can contribute another $1000 each year without being taxed. If you exceed those contribution limits, the IRS will assess a six percent penalty against those funds.
You should also note that the IRS can levy your HSA if you owe the government any money. If it takes money out of your HSA to settle a tax debt, you will pay a 20 percent penalty against those involuntary withdrawals if you are under the age of 65.
Nonetheless, your contributions are tax-deductible, allowing you to lower the amount of money that you would otherwise owe the IRS. You can also make tax-free withdrawals from your HSA to cover qualifying medical expenses not covered by your health insurance.
Your withdrawals will be tax-exempt if you use the money to pay for:
- medical services rendered by a licensed healthcare provider
- diagnostic services
- substance abuse treatment
Other HSA BenefitsA number of other advantages exist with opening or opting into an HSA through your job. First, HSAs come with no limit on the amount of money that you can carry over in them from year to year.
Likewise, there is no restriction on how often you can withdraw money from your HSA or when you can use those funds for qualifying medical expenses. All of the money in your HSA, even if the account is sponsored by your employer, belongs to you.
With that, tax experts recommend that you include a Health Savings Account as part of your investment portfolio. Your HSA should join other investments to which you contribute throughout the year, such as:
- a Roth IRA
- an employer-sponsored 401k
- 529 college savings plan
- other retirement accounts
If you do contribute to an employer-sponsored HSA at any time during the tax year, your employer will send you a W-2 that should have your contributions tallied and listed in Box 12 on that form. You should also receive a separate Form 5498 if you pay into an HSA throughout the year.
A Health Savings Account lets you and your employer save money that could help you pay for uncovered medical expenses throughout the year. Because the money you pay into it is tax-deductible and also exempt from taxation, you are encouraged to open or opt into an HSA to help you lower your tax burden. You also can take advantage of other benefits that come from opening and maintaining an HSA as part of your investment portfolio.