HSA tax advantages, 2018 contribution amounts released

Your Guide to State, Local, Federal, Estate + International Taxation

HSA tax advantages, tax, IRS, health careIn recent times, we have seen an explosion of activity regarding Health Savings Accounts (HSAs). In 2006, total HSA assets were valued at roughly $1.7 billion, and as of January 2017 they’re estimated to be $41 billion. The most intriguing aspect of these accounts is that the contributions are both tax-deductible and tax-free. The only requirement to remain tax free is that the funds you withdraw must be used for qualified medical expenses.

Positives

  • Tax-free – Contributions made to your account are tax-free if they are made by pre-tax dollars, and tax-deductible if the contributions are made by after-tax dollars. Assets in your account may also earn interest or other earnings with no tax consequences.
  • Rollover – Contributions are limited on an annual basis. However, unused assets build up with no expiration, with the accumulated value rolling over year after year.
  • Income – Contributions made to your HSA by your employer or other contributors are excludable from your net income.
  • Transitions – Your HSA is considered “portable” by the IRS. This means when you get a different job or become unemployed, your HSA remains with you.

Negatives

  • You must have a high-deductible health insurance policy – $1,300 and up for individuals, and at least $2,600 for families. If you are receiving Medicare or do not have high-deductible health insurance, you do not qualify for a HSA.
  • Early withdrawal penalties – If you withdraw funds and use them on non-qualified expenses before the age of 65, you owe the taxes on the amount withdrawn AND an additional 20% penalty. Over age 65, you owe tax for non-qualified expenses, but not the 20% penalty.
  • Maintenance and fees – In case of an audit, you should always keep evidence that funds withdrawn were used for qualified expenses.
  • Fees – Some institutions may charge usage fees such as transaction fees and/or account maintenance fees.

Even with some negative aspects, HSAs are quickly becoming a popular means to save and grow your money.

Contribution Limits

Regarding the annual limits for 2017, an employer or other contributor can put in up to $3,400 for individuals and up to $6,750 for families. If you are an account holder and at least 55 years old, you are allowed to contribute an additional $1,000 per year. For 2018, the IRS just announced those limits will go up by $50 for individuals to $3,450 and $150 for families to $6,900.

However, we may see even more change. The House recently passed the American Health Care Act (AHCA) which would potentially double the allowable contribution amount to at least $6,550 for individuals and $13,100 for families. Under the AHCA, HSAs could also become more flexible in regards to what is considered “qualified medical expenses,” possibly including over-the-counter medications, as well as lowering the 20% penalty for early, non-qualified expense withdrawals.

With long-term savings and post-retirement health care in mind, Health Savings Accounts are a wonderful utility to maximize tax advantages and cultivate long-term stability and growth.

Brandon Negri