Health savings accounts (HSA) and medical flex savings accounts (FSA) can be great for managing medical expenses if your employer offers them. And they offer real benefits come tax time. But they do come with some restrictions. Are you worried about spending your FSA money before the end of the year? Wondering if you’re getting the most tax benefit from your HSA? Here are some tips on each plan and some ways to help use the funds you need to use before the end of the year.
An HSA is a tax-exempt savings account for medical expenses and is available for taxpayers who are in a high deductible health plan (HDHP) – in other words, plans that make you spend a lot out-of-pocket before your insurance kicks in.
- Taxpayers can contribute up to $3,100 if they are enrolled in a self-only HDHP or $6,250 if they are enrolled in a family plan.
- You can deduct contributions directly from income on a tax return.
- The earnings in the plan – any interest or investment earnings – are not taxable.
- You can roll over the plan funds indefinitely, building up money year over year for future health expenses.
Taxpayers that withdraw funds from an HSA for reasons other than medical expenses will be required to pay income tax and, if under age 65, a penalty on the withdrawal.
An FSA is a non-taxed medical flex savings account offered through your employer. The plan allows you to contribute up to $2,500 of your annual salary into a special account before taxes are withheld.
One rule of FSAs is “use it or lose it. The rule each year has always been that you must spendhe funds in the account on medical expenses incurred before January 1, or you lose the money in the account.
But because it is difficult to determine the amount of out-of-pocket medical expenses you will have each year, the IRS recently decided to allow taxpayers to carry over up to $500 a year into the following year – so you might be able to carry some of your 2013 funds into 2014.
The new carry-over rule also allows taxpayers to make the maximum allowed contribution in addition to the carried over amount from a previous year. This new feature must be available in the plan your employer offers, so check with your employer if you think you may have funds left over from 2013.
If you need to spend down your FSA before December 31, consider making your semi-annual dental appointment, check-up appointments, and even eye exams before January 1. In addition, you can replace your glasses or contact lenses and even purchase medical devices such as a walker, orthotics, diabetic testing items and request reimbursement from your FSA for these items.
No tax-exempt health account? You may still be able to deduct medical expenses.
If you itemize deductions, you can deduct qualified health care expenses. These include:
- Prescription drugs
- Dental care
- Doctor visits, hospital visits
- Lab work and radiology
- 24 cents per mile for miles driven to receive care and fill prescriptions
Note that health insurance premiums can NOT be paid with FSA or HSA funds, but can be included in your itemized deductions. With so many ways to save on taxes, it’s worth a little bit of planning now to get every benefit your health care expenses earn for you! Questions about your spending? Stop in and ask your local Jackson Hewitt tax pro for help.