A Health Savings Account (HSA) can help you reduce your taxable income, and you can use it to pay for or reimburse yourself for medical expenses. Are you eligible for one?
Should You Consider Contributing to a Health Savings Account?
Contributing to a Health Savings Account can help you lower your taxable income
Part of your preparation for the new tax season should include an inventory of all deductions for which you might be eligible. A review of the costs associated with each key area of your life, including work, education, children, and health, can help clarify areas that may help reduce your taxable income.
A significant deduction source is a health savings account, or HSA, which is a tax-exempt account used to pay for or reimburse qualified medical expenses that generally would be eligible for the medical and dental expenses deduction. Pre-tax amounts contributed to an HSA account earn interest tax-free, and the account stays with you even if you change employers or leave the workforce. Unused funds carry over to the next year and there is no time limit on when the funds must be used, in contrast to a Flexible Spending Account, where unused funds are forfeited at the end of the year.
Even if you don’t itemize deductions on a Schedule A (Form 1040), contributions to an HSA can be claimed as a deduction. Additionally, contributions made by your employer to an HSA may be excluded from your gross income. HSA contributions should be reported on Form 8889 and filed with your Form 1040 or Form 1040NR.
An HSA is set up by a qualified entity such as a bank, insurance company, or anyone approved by the IRS to be a trustee of an Individual Retirement Arrangement (IRA). HSAs can only be established for individuals who qualify. There is no such thing as a joint HSA for married couples.
You must meet the following criteria to quality for an HSA account:
- You are covered by a high-deductible health plan (HDHP) on the first day of the month
- You have no other health coverage except worker’s compensation, insurance for a specific disease or illness, a fixed amount of coverage per day for hospitalization
- You are not enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return
If you or your employer have made contributions to your HSA plan this tax year, make sure you reap the benefits on your next tax return.
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