Health savings accounts can be used to pay for qualified medical expenses.
A health savings account, or HSA, provides a popular alternative to traditional health insurance. Individuals who have a high deductible health insurance plan, are eligible to contribute to an HSA. The account has some features that are similar to individual retirement accounts. Contributions to an HSA are tax deductible which reduces the amount of taxable income. Any earnings in the account are tax deferred and distributions are tax free as long as they are used to pay qualified medical expenses.
Instructions
1. Determine your HSA eligibility. To be eligible for an HSA you must have a high deductible health insurance plan and be under 65 years of age. For 2010, the plan would have a minimum annual deductible of $1,200 for self-only coverage. The deductible for a family would need to be equal to or greater than $2,400 a year. For self-only coverage, the 2010 limit on deductible contributions is $3,050. For family coverage, the 2010 limit is $6,150. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $5,950 for self-only coverage or $11,900 for family coverage.
2. Maximize contributions. To get the most out of the HSA account, it is best to contribute the maximum each year. This is a great advantage since medical expenses must exceed 7.5 percent of an individual's income to be deductible on income taxes. As soon as an HSA account is funded, the owner immediately receives the benefit of not paying tax on the contribution. An individual can contribute $3,050 in 2010 to an HSA. For those with family coverage, the 2010 contribution limit is $6,150. No matter when you open an HSA account, even in the last month of the year, the maximum contribution for the year may be made.
3. Over 55? Make catch up contributions.
Make catch-up contributions if you are 55 or older. Individuals and their covered spouses are eligible to make additional contributions of $1,000 per year. These additional contributions are also tax free and reduce the taxable income. The total contributions to an HSA can be used to pay the expenses of the account holder, their spouse or other dependents. Since HSA accounts are portable, they continue to benefit owners even if they leave their current employer.
4. Take advantage of the maximum employer contribution. Unlike many other employee benefits, an employer's contribution to your HSA account is not treated as additional income. Employer contributions are considered coverage for medical expenses and as such are excluded from your gross income up to the deduction limitation. Unlike flexible spending accounts which are "use or loose" at year end, HSA's continue to grow for the life of the owner and rollover from year to year.
5. Make tax free withdrawals. When qualified medical expenses are paid with an HSA account, the withdrawal is tax free. Qualified expenses are any costs considered qualified itemized deductions on your annual federal income taxes. Since many health plans do not include expenditures like eyeglasses or hearing aids, HSA accounts provide a tax advantaged way to pay for these items.
6. Minimize distributions. Of course individuals should use their HSA accounts for needed medical expenses, but if not needed in the current year, the account accrues earnings tax free. As long as the expenses are for qualified medical purposes they can be withdrawn even when the owner is over age 65 or no longer has a high deductible health plan. When the account is used for a qualifying medical expense, the withdrawal does not add to the owner's gross income. By contributing the maximum and minimizing distributions, a longer term account can grow and benefit the owner over a long time period, even into retirement. After the HSA owner's death, if the spouse is the beneficiary, the account becomes the spouse's HSA and the benefits continue.
7. Avoid non medical withdrawals. Making a withdrawal from an HSA account for non medical reasons is taxable. In addition, a 10 percent penalty is assessed. Those who are disabled or over age 65 may be able to qualify for non taxable, non medical deductions.
Tags: medical expenses, qualified medical, coverage 2010, deductible health, family coverage, health insurance, high deductible
