TAX TIP OF THE DAY... big tax deductions with HSAs
1) TAX DEDUCTIBLE CONTRIBUTIONS: Health Savings Account (HSA) contributions are tax deductible the year that you make the contribution. You don't need medical expenses to get the tax deduction. It's the contribution itself that creates the tax deduction.
2) TAX FREE WITHDRAWALS: HSA withdrawals are tax-free as long as used for medical expenses (also includes dental, vision, hearing, Rx... but not health insurance premiums). These expenses can be from past tax years as long as they were incurred AFTER the HSA start date.
3) HOW DO I WITHDRAW? 1) The HSA administrator gives you a card (similar to a debit card) that you can swipe at pharmacies, hospitals, doctor offices, etc. 2) You can also request that the administrator mail you a check at any time.
4) BEST TAX SAVINGS: pre-tax HSA contributions deducted from your paycheck at work reduce your taxable W-2 income. This saves you Federal, PA, Local, Social Security and Medicare tax... an average 37% of your HSA contribution given back to you in tax savings!
5) 2nd BEST TAX SAVINGS: If you set up an HSA on your own (not through your W-2 employer), your contributions save you Federal and PA tax... an average 28% of your HSA contribution given back to you in tax savings!
6) ADDITIONAL SAVINGS: Many employers make a contribution to your HSA to thank you for choosing an option that substantially reduces their company paid health insurance premiums. This is tax-free to you.
7) WHAT'S THE CATCH? You can only use an HSA with health insurance that have higher deductibles.
8) WHY IS THE IRS BEING SO NICE? Our government is pushing citizens toward health insurance plans with higher deductibles. It is thought to be a more efficient model of providing health care.
9) WHEN SHOULD I FRONT LOAD MY CONTRIBUTIONS IN THE BEGINNING OF THE TAX YEAR? If you expect to have significant medical expenses early in the year.
10) SAVINGS ACCOUNT STRATEGY: One strategy if you can afford to do so, is to pay medical expenses out-of-pocket and not use the HSA funds until later in life. Treat the HSA as a savings account that grows tax-free. Save current medical receipts to withdraw later in life... tax-free. A similar modified strategy is to only use the HSA funds for larger medical expenditures along the way (braces, surgeries, etc.).
11) RECORD KEEPING: Keep 2 file folders of expenses: 1) medical receipts that were paid by the HSA 2) medical receipts that were not paid from the HSA.
12) NO DOUBLE DIPPING: Don't deduct a medical expense on your tax return as an itemized deduction if it was paid via the HSA... or will be paid in the future via the HSA.
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If you need any help... www.baboiancpa.com