How Will a Health Care Savings Account Affect My Taxes?
Health Savings Accounts (or HSAs for short) are an exciting
new concept that may just make better and more affordable health
insurance available to the millions who aren’t lucky enough
to be covered by an employer-sponsored health plan.
The HSA Plan combines a relatively inexpensive, high deductible
health insurance policy and a tax-free IRA-like savings account.
Aside from making health insurance more affordable, there's a
great social benefit to HSAs: since participants contribute funds
themselves, they’re encouraged to be more watchful about
unnecessary medical tests and expenses.
And, if you don't spend the money in your HSA account, you keep
it!
The key tax benefits of the HSA account are four-fold:
- The money you put into the HSA is tax-deductible.
- The money in the account grows tax-free.
- You can make tax-free withdrawals to pay for any IRS-approved
medical expense. (There's no need for HMO approvals!)
- If you don't spend it this year, the money rolls over to
future years for medical expenses and keeps growing tax-free!
Two Types of HSAs
- The first type of HSA is a traditional health policy with
a $250 annual deductible (the amount you pay for medical expenses
before insurance kicks in), and no co-payments above that amount.
The premium (payment) for this plan would be roughly $300 a
month, or $3,600 a year.
- The second alternative is a high-deductible plan -- $2,500
-- and no co-payments above that amount, for an annual premium
of about $1,560. (In his State of the Union speech, the president
proposed making the monthly cost of this premium also tax-deductible.)
The difference in savings between the two plans is just over
$2,000 per year. (And if the $1,560 premium is made tax-deductible,
individuals in the 35 percent tax bracket would have an after-tax
premium cost of only about $950 per year -- a savings of more
than $2,500 per year!)
Smart Tax Savings with HSAs
You can use those savings to make deposits in your tax-deductible
HSA account. And that's the money you withdraw tax-free to pay
that first $2,500 of medical expenses, if you have them.
OK, so you didn't have the money to pay the $3,600 annual premium
for traditional health care. When the plans become available,
just buy the high-deductible insurance and put a small amount
in your HSA account.
Nothing says you have to deposit the entire $2,000 or $2,500
savings in the HSA. But later in the year, if you do have medical
expenses, put the money in so you get the tax deduction first,
and then pay the bills.
 |
