Health Savings Accounts (HSA) – A Fantastic Tax Planning Tool

Health Savings Accounts (HSA) – A Fantastic Tax Planning Tool – first introduced in 2003 via IRC § 223(b)(2)(A) were legislatively intended for individuals covered by high-deductible health plans to generally allow for preferential income tax treatment on money saved for medical expenses.

Many more US Taxpayers are taking advantage of Health Savings Accounts as a fantastic tax planning tool. If this applies to you, review the following resources to determine if you qualify and how to report:

• IRS Form 8889
• Instructions for Form 8889, Health Savings Accounts
• IRS Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans

Generally any adult without “first dollar coverage” AND a high-deductible health plan qualifies for an HSA.

Albeit NOT consider “substantial authority” the above links are resources to help you generally understand among other items the following subtopics:

1. qualified medical expenses,
2. qualified contributions,
3. distributions,
4. death of an account holder,
5. forms required

The most salient 2021 tax reporting points to glean from this post are:

• the annual limitation on deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,600 ($4,600 if over 55 y.0.).
• the annual limitation on deductions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $7,200 ($8,200 if over 55 y.o.).
• a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage
• annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $7,000 for self-only coverage or $14,000 for family coverage.

Special Notes

• Partnership contributions to a partner’s Health Savings Account (HSA); S corporation contributions to a 2-percent shareholder-employee’s HSA can be difficult to grasp, tread lightly.
• Generally both types of owners are treated essentially the same way.
• The rule of thumb is that if the contribution is treated as an expense to the entity it must be reported as income to the partner or shareholder subject to income and FICA tax.
• An HSA balance at the end of the year can carry over into future years, even if you change health plans and no longer are contributing to an HSA.
• An HSA balance upon retirement can be withdrawn penalty free, paying income tax on the distribution, similar toatraditional401(k).

For more of a drill down on Health Savings Accounts (HSA) – A Fantastic Tax Planning Tool – contact me today