Health savings accounts (HSAs) are IRA-like accounts that, along with a high-deductible health plan (HDHP), provide affordable health coverage. Taxwise, HSAs offer a number of attractive features.
1. Contributions are tax deductible
You don’t have to itemize to claim a deduction for contributions to your account; they are subtracted from gross income. For 2012, the contribution limit is $3,100 for a self-only account and $6,250 for a family account. If you are at least 55 years old, you can add another $1,000.
Under the “last month rule,” you can make an annual contribution as long as you have HDHP coverage for the last month of the year. However, you must continue HDHP coverage for another 12 months. For example, if you have coverage starting on December 1, 2012, you can contribute the full annual amount to your HSA provided your HDHP continues through December 31, 2013. If you fail to keep this coverage for the entire period, a portion of the coverage is recaptured and subject to a 10% penalty.
Premiums for the HDHP are an itemized medical expense unless you are self-employed and can deduct them from gross income. For 2012, an insurance policy is an HDHP if the annual deductible is at least $1,200 for self-only coverage or $2,400 for family coverage and the cap on annual out-of-pocket expenses is $6,050 for self-only coverage or $12,100 for family coverage.
2. Contributions made by your employer are tax free
If you have an HSA through work and your employer makes a contribution to your account, this benefit is not taxable income to you. If your employer contributes less than the annual limit, you can make up the difference by contributing this amount and deducting it on your personal tax return.
3. Earnings grow tax deferred
The interest or other income earned on your contributions is not taxed currently. This allows your savings to grow without any reduction for taxes.
4. Withdrawals for medical costs are tax free
You can tap your account to pay for qualified medical expenses at any time without any tax cost to you. Qualified medical costs include:
5. Use savings for retirement income
If you stay healthy and your HSA grows, you can use the money in retirement. While withdrawals for nonmedical purposes are taxable, there is no penalty on withdrawals after age 65; withdrawals before this birthday for nonmedical purposes are subject to a 20% penalty.
Compare your current health coverage with your HSA options to determine which plan can save you money while providing you with the health coverage you want.
In 2005, there were 20.6 million sole proprietors reporting $974.8 billion in gross receipts.
Source: Statistics of Income Bulletin Summer 2008View all factoids