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The Tax Benefits of Health Savings Accounts

Health Savings Accounts (HSAs) can provide significant tax savings if you qualify to open an HSA and use it properly. HSAs have become more attractive in recent years after the Tax Cuts and Jobs Act of 2017 increased the standard deduction significantly for each filing status. Increasing the standard deduction has made it even more difficult to come up with enough deductions to itemize, so many taxpayers are faced with a situation where they’re not able to deduct any medical expenses on their personal income tax return. The current standard deduction for each filing status is as follows:


This means that for the 2019 tax year a single filer will need itemized deductions in excess of $12,200 to claims those deductions on their personal income tax return. Couple the increased standard deduction with the fact that the IRS increased the adjusted gross income (AGI) threshold for taking itemized medical deductions from 7.5% to 10% of AGI and it has clearly become more difficult to deduct medical expenses on your personal income tax return. Opening an HSA may provide the solution for deducting a portion of your medical expenses on your personal tax return, but not everyone qualifies.


Do I qualify to open an HSA?

HSAs are only available to individuals and families with High Deductible Health Plans. For the 2019 tax year, the IRS defines High Deductible Health Plans as those having a deductible of at least $1,350 for individuals and $2,700 for families.


What are the tax benefits?

If you and/or your family qualify to open an HSA it is an attractive option to create tax savings. Taxpayers can pair the HSA with a High Deductible Health Plan to pay for out-of-pocket qualified medical expenses with pre-tax dollars. Most HSAs allow for anyone to contribute to your account: yourself, a spouse, your employer or a relative. If the employer contributes to your HSA, often the employer will contribute with pre-tax dollars that are reflected as a payroll deduction and not include in gross income on your W-2 at year-end. If you contribute to your own HSA or your employer contributes with after-tax dollars then you’re able to take an above the line deduction on your personal tax return in the amount of your contribution to the account for the year, but there are limits.


What is the HSA deduction limits?

There are two types of HSA accounts: individual accounts and family accounts. For the tax year 2019, individual accounts are limited to a contribution of $3,500 while family accounts are limited to a deductible contribution of $7,000. Taxpayers aged 55 or older are allowed an extra contribution of $1,000 for the tax year 2019. HSA accounts are only in one individual’s name. Therefore, each account is only permitted one additional contribution. For married couples that are both aged 55 or older, two separate accounts are necessary to take advantage of two separate $1,000 additional contributions to take advantage of the maximum contribution allowed by the IRS.


The Bottom Line

If you and/or your family are eligible to open an HSA it may create the ability to deduct medical expenses on your personal tax return where there was not one due to the increased standard deduction and the increased AGI threshold for taking medical expenses as an itemized deduction. The HSA may be funded many ways, but withdrawals from the account may only be used to pay for qualified medical expenses. Most institutions issue a debit card upon opening an HSA making it convenient to pay for out-of-pocket medical expenses. Contributions to the HSA are with pre-tax dollars and the account’s earnings may grow tax-free. If you have any questions regarding HSA accounts or would like to schedule a free consultation to discuss other tax saving strategies please reach out to Josh Conner at jconner@conner-cpa.com or at (863) 268-4374.

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