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"Health
Savings Accounts Can Mean Big Savings for Consumers"
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| Written
by Stephen Nelson, CPA
Concerned about the
high cost of healthcare? Worried that your insurance
doesn't cover all your costs? Fortunately, a partial
solution may be just around the corner. Since January
2004, taxpayers have had a tax savings tool called
Health Savings Accounts, or HSAs. These HSAs may solve
many of your healthcare cost problems. How an
HSA Works
In a nutshell, HSAs work like this. You buy a
specific type of major medical, or catastrophic
coverage, insurance called a High Deductible Health
Plan. (This special HSA-compatible insurance is also
known by the acronym HDHP.) Then, you annually
contribute up to roughly $5,100 for a family and up to
$2,600 for an individual--to a special health savings
account.
Mote that slightly higher deductions are available to
taxpayers over the age of 55. Also, annual deductions
are indexed for inflation.
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How You Save Taxes with
HSAs
HSAs work because you get a tax deduction for
the money you contribute to the health savings
account. However, as long you spend the money in
the account for eligible healthcare
expenses--pretty much anything reasonable--you
aren't taxed when you withdraw the money. Note
that HSAs deductions are not limited by taxpayer
incomes.
In effect, the HSA makes all or most of your
uncovered healthcare expenses fully deductible.
This is a big deal because for most people,
healthcare expenses are not deductible.
Just to put the value of an HSA into
perspective, a family can save from $500 to as
much as $1750 annually in income taxes by using
one of these accounts. The final savings,
predictably, depend on family income and the
state where the family lives.
One other thing. Don't confuse HSAs with the old
style Flexible Spending Accounts, or FSAs. With
FSAs, you lost the money you didn't spend by the
end of the year. With HSAs, you don't lose the
money. The unused balance just carries forward
to the next year.
Aren't Medical Expenses a Tax Deduction
Anyway?
No, not really. For most people medical expenses
are not a tax deduction. Here's why. Healthcare
expenses do count as an itemized deduction for
people who don't use the standard deduction.
However, only the portions of one's healthcare
costs that exceed 7.5% of adjusted gross income
get deducted. That means that most people never
get to use their healthcare costs as tax
deductions because their healthcare costs don't
cross the 7.5% threshold.
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Another
Benefit: HSAs May Also Save Premiums
HSAs sometimes produce another economic benefit.
The HDHP insurance itself may save people money
because they buy less insurance. This is
especially true for people who aren't already
using major medical insurance.
How to Set Up a Health Savings
Account
HSA accounts aren't difficult to set up.
Essentially, you do just two things. (1) Get
medical insurance that qualifies as an HDHP, and
(2) Open an HSA account with a bank that offers
HSAs. Your current medical insurance provider is
a good place to start your search for HDHP
insurance. You can also check with your state's
Blue Cross or Blue Shield insurer.
Three Warnings about HSAs
For what it's worth, I am now using an HSA
myself. (I got my HDHP from Premera Blue Cross
and use an HSA account from HSA Bank.) But let
me also share three caveats: First, obviously,
you never want to cancel one insurance policy
until you're sure you have a replacement policy.
Second, you do need to be careful about the fees
associated with the HSA "bank
account," so shop around. Third, if you
withdraw money from an HSA for something other
than a valid medical expense, the withdrawal is
taxable and subject to a 10% penalty.
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| Bellevue-Redmond
CPA Stephen L. Nelson is the
author of both Quicken for Dummies and
QuickBooks for Dummies and an adjunct tax
professor for Golden Gate University's graduate
tax school. |
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