HSA Offers Tax Deduction and Greater Control over Your Healthcare Dollars
HSA account holders have greater control over their healthcare dollars as a result of The Tax Relief and Health Care Act of 2006. One of the most powerful features of health savings accounts is the fact that you get a tax deduction for contributions. The second powerful feature of a health savings account is the fact that distributions are tax-free as long as the money is used for healthcare expenses.
Many people may not realize the benefit of making the most of their annual contributions to their health savings account. The Tax Relief and Health Care Act of 2006 increased contribution maximums. HSA contributions are no longer limited to the annual deductible selected with your qualified high deductible health plan (HDHP). In 2008, you can contribute up to $2,900 for single coverage and up to $5,800 for family coverage.
To get a tax deduction for your contributions, however, you must be eligible to contribute. To qualify for a health savings account, you must meet the following three requirements:
1. You must have a high deductible health plan (HDHP). If you do not have a high deductible health plan (HDHP), you can obtain .
2. You cannot have any other health insurance that is not a high deductible health plan. However, you can have other health insurance that provides benefits for:
- A specific disease or illness.
- A fixed amount per day (or other period) of hospitalization.
- Liabilities incurred under workers’ compensation laws.
- Accidents.
- Disability.
- Dental care.
- Vision care.
- Long-term care.
3. You cannot be claimed as a dependent on someone else’s tax return.
In addition to increased contribution maximums, you can also make the full contribution amount for the first year of your HSA - if you had coverage under a HDHP on the first day of the last month of the tax year. Under the last month rule, if you enrolled in a qualified high deductible health plan (HDHP) on the first day of the last month of the tax year, you are treated as having had coverage for the entire year. You would be eligible to make contributions up to the full annual limit. However, you must have coverage under a qualified high deductible health plan (HDHP) and remain eligible for a one year testing period which begins with the last month of your tax year and ends 12 months after the end of the calendar year in which you enrolled in an HDHP. Otherwise you will be subject to income tax and a 10 percent additional tax on contributions for months not covered by a HDHP unless you fail to remain eligible due to death or disability.
If you have individual health insurance that qualifies as a high deductible health plan (HDHP), you can receive two significant tax benefits not available elsewhere. You can receive:
1. A tax deduction for HSA contributions, and
2. Tax-free distributions as long as the money is used for healthcare expenses.
Where else can you receive both a tax deduction for contributions and tax free distributions? What’s more, the tax deduction for contributions is an above the line deduction. An above the line deduction reduces adjusted gross income (AGI) and is usually worth more than an itemized deduction.
A third benefit as a result of The Tax Relief and Health Care Act of 2006 is the ability to fund HSAs with IRA distributions. You can take a onetime tax free distribution from your IRA (Individual Retirement Account) and transfer the money to your HSA. With an IRA rollover to an HSA, the funds would immediately be available to meet your healthcare needs. An IRA rollover to a health savings account can only be made once during the lifetime of the account holder from a Traditional or Roth IRA.
Please note: References are to federal tax
laws and are subject to change. State tax laws may differ. If tax
advice is required, you should seek the services of a tax professional.
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