We are heading down the final stretch of 2012 and for many that means that it is time to review their benefits including medical, 401k and other fringe benefits. One of those areas that are offered is the health savings account and it is seldom used, but offers many benefits.
In an era of temporary tax provisions, health savings accounts (HSAs) have been around a long time, and little has changed since they were first introduced in 2003. More importantly, HSAs offer tax benefits, many of which stay in place under the new health care laws.
Here's a refresher on how HSAs work.
- An HSA has two parts, a high-deductible health insurance policy and a savings account. The idea is simple: You buy a health plan with a high deductible, and you deposit cash into a savings or investment account to pay the policy deductible and other qualified out-of-pocket medical expenses.
- The tax benefit comes from the way the savings account part of the HSA works, which is similar to a traditional individual retirement account. For example, you can claim a federal income tax deduction for contributions to your HSA, and the deduction is above the line, meaning you can benefit without having to itemize.
- For 2012, the maximum tax-deductible contribution is $3,100 when the insurance plan covers only you, or $6,250 when you purchase an insurance plan for your family. When you're age 55 or older, you can contribute, and deduct, an extra $1,000.
- In addition, interest, dividends, or other growth in the account is tax-free as long as you use withdrawals for qualified medical expenses. What happens if you use the money for other purposes? The withdrawals are included in income, taxed at your regular rate, and subject to a 20% penalty.
- Other rules apply, including the opportunity to fund an HSA with a tax-free rollover from your individual retirement account.
Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.