Unless you truly enjoy writing checks to Uncle Sam, you’re likely on the lookout to find as many tax deductions as possible before April 15. If you haven’t checked out your health savings account (HSA) lately, now’s the time to see if there’s room to squeeze in a few more dollars. As long as your HSA-qualified plan was in place by December 1, 2013, you can make contributions up until April 15 in order to claim a deduction on your 2013 tax return.
For 2013 individuals can contribute up to $3,250 into an HSA, and families can contribute up to $6,450. If you’re 55 or older, you can contribute any additional $1,000 as a “catch-up” contribution. HSA contributions are deducted on page one of your federal tax return, similar to student loan interest, and directly lower the amount of taxes you owe. And you don’t have to itemize to claim an HSA deduction!
An individual who fully funds their HSA for 2013 can save as much as $1,072.50 in taxes, and a family can save as much as $2,128.50 (assuming a 28% federal tax rate and 5% state tax rate). Savings like that can pay for a nice spring break vacation!
If you notice you’ve overfunded your HSA, it’s important you contact your HSA administrator and make the appropriate withdrawal before April 15. If you don’t make your withdrawal in time, the excess contribution and any earnings are subject to a 6% tax penalty.
How to Use Your HSA Money Tax Free
As long as you use your HSA to pay for qualified medical expenses, your money remains completely tax free. And because you’re using your own money to pay for medical expenses including deductibles, coinsurance, and other medical expenses, you tend to focus more on staying healthy and are more aware of your medical costs.
To maximize your savings, shop around before receiving medical care. You’ll be surprised at the price differences of a simple MRI. You could easily rack up hundreds of dollars in savings just by calling around first. Read more about price transparency and how to save on medical expenses by reading our previous blog, “Avoid Sticker Shock and Demand Price Transparency.”
If you find it necessary to withdrawal money from your HSA for nonqualified expenses or other personal reasons (prior to age 65), you’ll be subject to a 20 percent federal tax penalty – so you’ll want to avoid doing that at all costs. After the age of 65, you can use your HSA for anything you deem necessary, and the withdrawal is only taxed as retirement income.
How an HSA Can Help You Qualify for a Premium Subsidy
When you claim an HSA deduction on your tax return, it ultimately lowers your modified adjust gross income, or MAGI. Your MAGI is the “magic number” the government uses to determine your eligibility for premium tax credits that will help lower your health insurance premiums.
As you can see on our subsidy Web page, if you make less than 400 percent of the federal poverty level, you qualify for a premium subsidy. But if you make just $1 over the income limit, you are disqualified from receiving premium assistance. The amount of your subsidy can also change by simply making $1 over the income level in any income bracket.
By contributing to an HSA, you can significantly lower your MAGI and not only reduce your taxes, but possibly qualify for thousands of dollars in premium assistance that will help minimize your premium payments and maximize your health care benefits.
March 31 – Last Day to Sign up for a Health Plan
HSA-qualified plans are offered on the federal exchange and state marketplaces and are eligible for premium assistance if you qualify. The premiums are less expensive than traditional health plans as well, adding to your potential savings. To get a plan before the open enrollment period ends, you must apply no later than March 31.
Do you have any questions we can answer about taxes or how an HSA can reduce your tax burden? What are your feelings on price transparency?