Understand how Your Health Savings Account (HSA) will be Taxed

Let’s face it, health costs are skyrocketing. They increase far faster than inflation, and to offset the costs, health insurance companies have to charge more or drastically increase deductibles. For those who have their own insurance, and they have to have a plan that has a high deductible, there are options. A Health Savings Account (HSA) might help you to pay for your health bills, and be able to deduct the costs off your insurance. Here is how they work.

Qualifying for an HSA

There is really only one requirement for you to be able to utilize an HSA: you have to have an individual insurance policy with a deductible of at least $1,300 (for a single person policy) or $2,600 (for a family policy). If you meet that requirement (for calendar year 2015, these number adjust every year), then you can open an HSA through your local bank and start funding it. There are some rules on how much you can put into your HSA though.

Your HSA will have an annual contribution limit of $3,350 for a single person policy, or $6,650 for a family plan. This means that every year you can put as much as you want into your HSA, as long as you don’t go over the contribution limit.

How to Use an HSA

The nice part about money in your HSA is that it never expires. There are some plans, like employer flex plans, that are use-it-or-lose-it. With those plans you have to use all of the money in your account, or it will expire at the end of the year (meaning you will essentially give the money back to your employer or insurance company that manages the plan).

In order to avoid a 20% penalty, you must use your HSA money for qualified medical expenses. These expenses include items such as prescription medication, hospital co-pays, hospital payments until your deductible is met, and a few others. What is not included, however, are insurance premiums.

Many people choose to use their HSA in this manner: They receive a bill from the hospital for $500. They go to their bank and transfer $500 into their HSA, and then write a check to the hospital out of their HSA account. That way they don’t have money tied up in the HSA account that isn’t being used for anything.

Tax Consequences of an HSA

Here’s the best part about the HSA. Any money that goes into your account is completely tax deductible. It helps to give you a little break on your taxes by providing just one more write-off. It’s money that was going to be spent anyway, so you might as well get to see a tax deduction from it.

HSA’s earn a small amount of interest. Any interest added to the HSA is tax-free. You never have to pay a dime in taxes on that money (unless it goes to something other than a qualified medical expense).

Even if you start a new job and no longer have the high deductible insurance policy, you can still use your HSA (you simply can’t add to it any longer).

Practical Taxes Can Help

Here at Practical Taxes we can help you get the taxes side of your HSA sorted out. It is up to you, however, to get the account set up. Your accountant in Billings, Montana can’t set up the HSA for you.

A+ does more than just taxes though! We are a full service accounting firm in Billings, Montana. We can help with payroll services, business consultation, and much more! Any of your accounting needs can be handled through us, and that frees up a lot of your time. Call 406-894-2050 to learn more.