As one year wraps up and a new one begins many individuals and businesses turn their attention toward decreasing their tax burden. One consideration to keep in mind is an HSA. As you move forward into the new year, you should be aware of what HSAs are as well as the tax benefits they provide.
Health savings accounts were designed to help those with high-deductible health insurance to save the necessary funds to cover the non-deductible health care expenses they might incur without the tax penalty of counting it as earned income. Contributions into a health savings account are tax-deductible, but many elect to have funds for the account removed from their paycheck pre-tax as an added convenience.
Before going any further, a distinction needs to be drawn between an FSA and an HSA. An FSA can also help you save money throughout the year to cover non-deductible medical expenses. However, it has a maximum year-to-year carry-over of $500, which means that any cash above that limit you accumulated in your FSA during the year will become taxable income. That is not true with an HSA, which has no carry-over limit.
Because you are allowed an unlimited year-to-year carry-over, an HSA can become an additional savings tool for covering health expenses in retirement with three tax benefits attached to it. The benefits provided include:
-Tax-deductible or pre-tax savings. Contributions into your HSA can be deducted from your paycheck pre-tax or deducted from your taxes on your tax return.
- Tax-deferred growth. Any interest accrued in your HSA is not taxable.
- Tax-free income dedicated to qualified medical expenses. When used for qualified medical expenses, funds from your HSA are not subject to taxation.
As one year rolls over into the next and you are considering ways to reduce your tax burden as well as your overall expenses, you might keep HSAs in mind. To learn more about the tax benefits of HSAs and how they work contact Foster Financial CPA.