HSA stands for Health Savings Account, a relatively new way to save for medical expenses. HSA accounts must be linked to a high deductible health insurance plan (often abbreviated HDHP). Such a plan must have a deductible of $1,100 for individuals or $2,200 for families. While that requirement alone may make this kind of plan undesirable, there are significant potential benefits for many taxpayers.

1. HSA contributions occur either pre-tax through payroll deductions or can be deducted from gross income on your tax return.
2. Funds in an HSA account grow tax free (just like an IRA or 401k), but they are also tax free when used to reimburse you for health expenses. Just save those receipts!
   
3. The health expenses that qualify for reimbursement from an HSA are more inclusive than those that qualify for deduction on your taxes as a medical expense. For example, you can include over the counter medicines.
4. You get the tax deduction when contributions are made to the account rather than when medical expenses are incurred. The benefit? If you incur large medical expenses, you probably couldn’t work the whole year. An HSA lets you take the deductions when you income is highest.
5. There is no requirement to be reimbursed immediately. You could save up medical expense receipts for several years before taking a distribution from an HSA, giving the money there time to grow tax free.

Of course, each person should carefully consider the differences in plan benefits, costs and tax savings before making a choice. An excellent FAQ is offered by ACS|Mellon (please note, this is not a recommendation or endorsement; many banks offer HSA accounts) and the IRS offers information in Publication 969.

Categories: Tax News and Tips
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