One of the most important things in life is maintaining proper health care, but this comes with many costs. To make these health care costs less of a burden on taxpayers, Congress has designed many tax-favorable programs.
Health Savings Accounts (HSAs)
An HSA is a U.S. trust or custodial account set up for the exclusive purpose of paying the account beneficiary’s qualified medical expenses. Only eligible individuals can set up HSAs, which is determined on a month-by-month basis. You are deemed an eligible individual for a month if:
• You are covered under a high-deductible health plan (HDHP) on the first day of that month;
• Are not also covered by any other health plan that is not an HDHP;
• Are not entitled to benefits under Medicare
• Cannot be claimed as a dependent on another person’s tax return.
The maximum amount that an eligible individual can contribute to an HSA for the tax year is equal to the sum of the monthly limits for all the months during the tax year that the individual is deemed eligible. The monthly limit is 1/12 of the annual limit (subject to inflation). For 2016, the annual limits are:
• $3,350 for self-only coverage ($279.16/month)
• $6,750 for family coverage ($562.50/month)
• If you are age 55 and older by the end of the year, you can make an additional “catch up contribution” of up to $1,000 a year.
You (the eligible taxpayer), or any other person on your behalf (including family members and employers) can contribute to an HSA. Other than employer contributions, all contributions made are deductible on your tax return, depending on whether or not you itemize deductions. Distributions from HSAs that are used to pay qualified medical expenses are not taxed.
Other Tax Favorable Programs
• Medical Savings Accounts (MSAs), including Archer MSAs and Medicare Advantage MSAs. Archer MSAs may receive contributions from both you and your employers, but not both in the same year. Contributions are deductible, depending on whether or not you itemize deductions. Employer contributions to an Archer MSA are not included in income. Distributions from an Archer MSA that are used to pay for qualified medical expenses are not taxed.
• Health Flexible Spending Arrangements (FSAs): Both eligible individuals and employers can contribute to an FSA. They are not includible in income, and reimbursements from FSAs that are used to pay for qualified medical expenses are not taxed.
• Health Reimbursement Arrangements (HRAs): these are limited to receiving contributions from an employer only. They are not includible in income, and reimbursements from HRAs that are used to pay for qualified medical expenses are not taxed.
We at Mazur & Associates CPAs have the expertise and knowledge to help you decide on the type of medical expense savings account that best fits your situation. Please don’t hesitate to call us with any questions, or schedule a face to face meeting at our office. Our phone number is (732) 936-1230.