| Concerned about the high cost of healthcare? | | | | unused balance just carries forward to the next |
| Worried that your insurance doesn't cover all your | | | | year. |
| costs? Fortunately, a partial solution may be just | | | | Aren't Medical Expenses a Tax Deduction |
| around the corner. Since January 2004, taxpayers | | | | Anyway? |
| have had a tax savings tool called Health Savings | | | | No, not really. For most people medical expenses |
| Accounts, or HSAs. These HSAs may solve many | | | | are not a tax deduction. Here's why. Healthcare |
| of your healthcare cost problems. | | | | expenses do count as an itemized deduction for |
| How an HSA Works | | | | people who don't use the standard deduction. |
| In a nutshell, HSAs work like this. You buy a | | | | However, only the portions of one's healthcare |
| specific type of major medical, or catastrophic | | | | costs that exceed 7.5% of adjusted gross |
| coverage, insurance called a High Deductible Health | | | | income get deducted. That means that most |
| Plan. (This special HSA-compatible insurance is also | | | | people never get to use their healthcare costs as |
| known by the acronym HDHP.) Then, you annually | | | | tax deductions because their healthcare costs |
| contribute up to roughly $5,100 for a family and | | | | don't cross the 7.5% threshold. |
| up to $2,600 for an individual--to a special health | | | | Another Benefit: HSAs May Also Save Premiums |
| savings account. (Note that slightly higher | | | | HSAs sometimes produce another economic |
| deductions are available to taxpayers over the | | | | benefit. The HDHP insurance itself may save |
| age of 55. Also, annual deductions are indexed for | | | | people money because they buy less insurance. |
| inflation.) | | | | This is especially true for people who aren't |
| How You Save Taxes with HSAs | | | | already using major medical insurance. |
| HSAs work because you get a tax deduction for | | | | How to Set Up a Health Savings Account |
| the money you contribute to the health savings | | | | HSA accounts aren't difficult to set up. Essentially, |
| account. However, as long you spend the money | | | | you do just two things. (1) Get medical insurance |
| in the account for eligible healthcare | | | | that qualifies as an HDHP, and (2) Open an HSA |
| expenses-pretty much anything reasonable-you | | | | account with a bank that offers HSAs. Your |
| aren't taxed when you withdraw the money. Note | | | | current medical insurance provider is a good place |
| that HSAs deductions are not limited by taxpayer | | | | to start your search for HDHP insurance. You can |
| incomes. | | | | also check with your state's Blue Cross or Blue |
| In effect, the HSA makes all or most of your | | | | Shield insurer. |
| uncovered healthcare expenses fully deductible. | | | | Three Warnings about HSAs |
| This is a big deal because for most people, | | | | For what it's worth, I am now using an HSA |
| healthcare expenses are not deductible. | | | | myself. (I got my HDHP from Premera Blue Cross |
| Just to put the value of an HSA into perspective, | | | | and use an HSA account from HSA Bank.) But let |
| a family can save from $500 to as much as | | | | me also share three caveats: First, obviously, you |
| $1750 annually in income taxes by using one of | | | | never want to cancel one insurance policy until |
| these accounts. The final savings, predictably, | | | | you're sure you have a replacement policy. |
| depend on family income and the state where the | | | | Second, you do need to be careful about the |
| family lives. | | | | fees associated with the HSA "bank account," so |
| One other thing. | | | | shop around. Third, if you withdraw money from |
| Don't confuse HSAs with the old style Flexible | | | | an HSA for something other than a valid medical |
| Spending Accounts, or FSAs. With FSAs, you lost | | | | expense, the withdrawal is taxable and subject to |
| the money you didn't spend by the end of the | | | | a 10% penalty. |
| year. With HSAs, you don't lose the money. The | | | | |