Tax Benefits of Health Savings Accounts:

When Congress introduced Health Savings Accounts in 2004, they announced that the money that is contributed to an HSA and the interest that accrues in the account, are not subject to taxation In addition, if you do not itemize your deductions, the amount of money that you spend on your health care needs from your HSA can be deducted from your earnings each year.

How do these tax savings work? There are many misconceptions about this new program and it is vital to understand exactly what your tax benefits will be before you sign up for a health savings account. First, you will need to have an existing health insurance policy that is eligible for an HSA, or you may need to purchase an HSA eligible health insurance plan. In order for your plan to be eligible, it will need to have a deductible that is greater than $1000 per year and it may not have a co-pay for healthcare needs.

Now, let's take a look at how your tax savings will work.

Tax Deductible Contributions

The money that you put into your HSA or that your employer contributes to your HSA is not taxable. Each year, you are allowed to contribute a maximum of $2650 to your HSA if you are single or $5250 if you have a family plan. This amount will not be taxed as income. In addition, there are no income restrictions, meaning that low-income individuals and families can take advantage of these tax-free contributions.

Since you would be paying this money out to your health insurance company any way, having the ability to contribute without taxation to your HSA can represent significant savings each year.

A contribution to your health savings account is considered to be an above-the-line tax deduction for the previous year, as long as you contribute the amount to your HSA before April 15th. In the case of an employer's contribution, you will not have to pay any income or FICA tax on this contribution.

In addition to federal tax savings, many states are now featuring additional tax savings. This means that you can tax a state income tax deduction for your contributions to your health savings account.

Tax-Subsidized Medical Expenses

The other feature of an HSA for even greater tax savings is that even though you were able to contribute your money to your health savings account tax free, you can still spend it tax-free, so long as the expenditures are considered as a qualified medical expense.

This means that you will not be taxed on payments that you make to your physician for medical care, prescription drug purchases and supplies that are prescribed by your doctor. Even medical care that is not normally covered by an insurance plan can be paid for with your HSA, tax-free. This includes dental expenses, physical therapy, mental therapy and alternative treatments. You will, however, need to make sure that these treatments or therapies are included as a "qualified medical expense" in the IRS publication #502. As long as the treatment is included in this list, you will be able to use your HSA funds, tax-free, to pay for them.

Premium Savings

Your HSA allows you to use your funds to pay for your health insurance premiums, again, tax-free. Although the premiums for a high-deductible insurance plan are much lower than low-deductible plans, this can mean a savings of as much as $5000 per year when you consider your lower premiums and the ability to pay the premiums with your HSA funds without taxation.

This amount of savings may vary, depending on your location and your current health insurance plan. However, in general, you will end up saving much more money by using your HSA than you would with a low-deductible insurance plan that forces you to make co-payments for your health care.

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