Health Savings Account Tax Deductions

A Health Savings Account or HSA is tax advantaged medical savings account that is owned by the individual. They are designed to be used in conjunction with a High Deductible Health Insurance Plan. The money contributed to the account are not subject to federal tax at the time of deposit (Pre-Tax Dollars). Funds in a Health Savings Account can be used to pay all eligible medical related expenses not covered by your Health Insurance Plan.

Health Savings Accounts Pair Well With Obamacare Plans

For 2015 Higher Limits for HSA Contributions & Deductibles

ObamaCare and the Health Savings Accounts

For 2015, the contributions limits are $3,350 for single taxpayers, $6,650 for married taxpayers, with an additional $1,000 available for individuals over 55 years of age.

In order to establish a Health Savings Account ( HSA ) you must have a High Deductible Health Plan ( HDHP ). 
Your HSA account has investment options similar to an IRA account. Money market or similar cash instruments are common as people want to make sure funds are available to cover out of pocket medical expenses. If your balance grows beyond your annual maximum out of pocket expenses, then you may choose to put the excess into a stock mutual fund or other "at risk" investment option. Your HSA administrator may charge extra fees to establish brokerage services. Please consult your account representative for advise and investment options.
You can use your health savings account to pay for a wide range of medical and health related services. When you incur a medical or health related expense that is not covered by your insurance, there is a good chance that you can pay for it out of your HSA.
The IRS defines qualified expenses as: "Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.
Medical expenses include all out of pocket expenses for medical care and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and can include insurance premiums (Cobra) if you are unemployed.

Examples of HSA Qualfied Expenses Include:
Doctor Visits and Tests not covered by your insurance policy.
Surgical procedures and hospitalization related charges not covered by your insurance.
Prescription Drugs

Certain OTC Drugs qualify but now need a prescription from your doctor.
Insulin as well as Diabetic Testing Supplies
Vitamins & supplements do not qualify.
Accupuncture & Chiropractic Care
Eye Exams, Glasses and Laser Surgery
Hearing Tests and Hearing Aids
Dental Exams, Dental Work and Dentures
Alcohol and Drug Abuse Treatment
Insulin and Diabetic Testing Supplies
Long Term Care related expenses.
Wheel Chairs, hand rails or other disability related home improvements.
Your health insurance provider or HSA administrator will provide you with a complete list of goods and services that are eligible.
The complete list is also available on pages 5-14 on IRS Publication 502
Make sure you save all your HSA related receipts in case you are ever audited. Similar to a tax audit you will need proof of what you purchased using your account.
The health insurance provider where you purchase your High Deductible Health Plan will provide you with a list of local institutions or you can choose any institution that sponsors HSA plans.

Funds can be withdrawn for any reason using checks and debit cards, however any withdrawls that are not used for qualified medical expenses are subject to a 20% penalty as well as income taxes. The 20% penalty is waived for people age 65 and older or those who have become disabled. Income taxes still apply in these situations but there is no additional penatlies. These rules are very similar to the ones governing other tax sheltered accounts such as IRAs.

Any funds withdrawn for qualified medical expenses are always tax free. You must however keep documentation pertaining to all qualifed medical purchases. A lack of documentation can be grounds for the IRS to rule that funds were not used for qualified medical expenses and the account holder would be subject to additional penalties.

When an account holder dies, the funds transfer to the beneficiary designated on the account. If a surviving spouse is the beneficiary, the funds will transfer on a tax free basis.

Health Care Strategies by Mark Kohler

Post Updated May 8, 2015