Woodland Hills, CA – Nooshin Boloorian, accountant and officer/shareholder of NB & Associates, provides full-service accounting, bookkeeping, payroll, and tax-preparation for her clients. Here she gives some insight about the tax benefits of health saving accounts.
Nooshin says “If you have a high-deductible health insurance plan, you probably know how important it is to have a Health Savings Account (HSA) to save for those medical expenses that come out of your pocket.”
According to her, HSAs offer great tax savings to people who qualify for it. She informs that unlike the well-known flexible spending accounts that operate on the “use it or lose it” principal, funds can be accumulated in HSAs over a period of years without losing unspent balance. Nooshin further ads that HSA’s are tax-deductible savings plans, and if a person has an employer that offers one, the funds can be deducted from a check with pre-tax dollars. HSA can also earn interest and dividends, all of which are tax-exempt at the federal level. Withdrawals from HSA are tax-free as long as the funds are used for qualified medical expenses.
Giving some insight on what qualifies as expenses; Nooshin says, “Qualified expenses include such things as your health insurance deductible, certain medical equipment, vision care, dental care and prescriptions, among others. Keep in mind, though, that tax-free withdrawals are allowed only for prescription drugs. Over-the-counter drugs do not qualify.”
Nooshin informs that one must be enrolled in a high-deductible insurance plan in order to be eligible for an HSA. A person also cannot be covered by another health insurance plan (such as a PPO provided by the spouse’s employer). For 2017, the insurance plan must have a deductible of at least $1,300 for self-only coverage and $2,600 for the family. You can contribute up to $3,400 as an individual to your HSA in 2017. Family contributions max out at $6,750. If a person is 55 or older at year end, then they are entitled to make a catch-up contribution of an additional $1,000 into the HSA.
Taking money out of the HSA for anything other than qualified medical expenses means having to pay income tax on the funds as well as getting hit with a 20% non-qualified withdrawal penalty.
How to set up an HSA if you don’t already have one?
- Get your high deductible health insurance coverage. Start the new year off right with your health insurance coverage in place to qualify you for an HSA.
- Set up your HSA as soon as you get your insurance coverage. You can’t take tax-free withdrawals for medical expenses incurred prior to the account being established so it’s important to get the HSA set up as soon as possible. Many financial institutions offer options for HSAs, so shop around to find the best return on your money. If you are an employee, check with your Human Resources department to find out how to enroll in the company plan.
- Make your first contribution. You have until April 15th of the following calendar year to make a contribution for the previous year.
- Contact your tax preparer to help you calculate your deductible HSA contributions for the year. This will be reported on Form 8889 of the 1040. For contributions, you will receive a Form 5498-SA from your insurance provider telling you how much you put in to HSA during the year.
Nooshin Boloorian is an accountant and officer/shareholder of NB & Associates, a full-service accounting, bookkeeping, payroll, and tax-preparation firm in Woodland Hills, California. Nooshin earned her accounting degree from California State University Northridge and is an IRS Registered Tax Professional (PTIN) licensed by the California Tax Education Council (CTEC). She provides bookkeeping, payroll, and tax services for individuals, small and medium-sized businesses, and independent professionals throughout Southern California.