Friday, March 30, 2012

Health Savings Accounts or HSAs

In my last blog, I explained how and when medical expenses are deductible.  I didn't get to the Health Savings Account, or HSA.  HSAs are special accounts that get favorable tax treatment for these funds set aside for medical expenses.  My advice:  if you have an HSA, USE IT.  Fund it as much as you can, and take advantage of this great tax deduction.

In my experience, HSAs underused.  I think a lot of people don't really understand what they are and how much they can really benefit from them.

Why use an HSA?  All of the hurdles and pitfalls of deducting medical expenses are avoided if you have this account.  Basically, you get an above-the-line deduction for funding your HSA. You don't have to itemize. You don't have to meet any 7.5% floor.  You don't even have to be sick or have medical expenses. You get the deduction when you put the money into the account, not when you spend it. The only catch is that if you take a distribution NOT for medical expenses, that part of the distribution is subject to a 20% penalty. Keep good records in case the IRS questions you.

How do I get an HSA?  First, you must have a medical plan that allows an HSA. These must be high-deductible plans, with a minimum deductible of $1200 for single coverage and $2400 for family coverage. Check with your benefits provider to be sure your plan qualifies.  Then you can open your HSA at most banks; some plans may prefer a specific account holder.

How do I fund my HSA?  Just make a deposit!  Most of the HSA holders I see only have it because their employer set it up and contributes to it.  Employers can save so much on the premiums, they will contribute a small amount to the employee's HSA. These employees are perhaps not fully taking advantate of the HSA.  Even if your employer contributes, you can also contribute up to the limit ($6250 in 2012 for family coverage).  It's not a "use it or lose it" plan.  Any unused portion stays in the account earning interest, until you need it for medical expenses. This is a key difference from the old Flexible Spending Accounts many employers offer (which are very good plans if you can't have an HSA).

How do I get the money out of the HSA?  Your account is generally just a checking account.  Some plans/accounts will provide debit card to use for purchases. Any time you have a medical expense, use that account to pay.  But what happens if you don't have that checkbook with you?  Or if you have mixed purchases at a store; I may buy Clif Bars with my prescription at Target. Or I may want to use my credit card to pay the Cleveland Clinic so I can earn reward points. That's okay. What I do is keep track of all my expenses and periodically reimburse myself for the medical expenses I paid outside my HSA. I have all the receipts to justify every payment from the HSA.

How do I report the HSA on my tax return? Form 8889 is needed ( and instructions at  At tax time, you will receive a two statements; a 1099SA reporting your distributions from the HSA, and a 5498-SA, reporting how much went in to the HSA. Report the contributions in Part I and distributions in Part II.

for a list of qualified medical expenses.  You can use HSA funds for things not covered by your plan; co-pays, co-insurance, eye glasses, orthodontia, excess chiropractor visits, etc.

Tuesday, March 20, 2012

Medical expenses - what's deductible?

Medical expenses can be a confusing deduction for many taxpayers.  What exactly is deductible?  And why don't all my medical expenses help reduce my taxes?

Medical expenses only help if they exceed 7.5% of your Adjusted Gross Income (AGI). To give you a ballpark of how much that is, if your income is $50,000, you will need over $3,750 in medical expenses before they might reduce your taxes.  That is the first hurdle.

The second hurdle is the standard deduction.  Even though you may have over 7.5% in medical expenses, your other itemized deductions (mortgage interest, property taxes, charitable donations, etc) , may be less than the standard deduction.  For your 2011 taxes, the standard deduction for a single person is $5,800, and for married couple filing jointly it's $11,600.  For those over 65 it's even higher.  So if you don't normally itemize, the excess medical expenses might not help you on your Federal retun.

There is one thing to keep in mind even if you don't itemize.  The excess medical expenses (i.e., those over 7.5%) are one of the few deductions that you can use on your Ohio return.  This will reduce your Ohio tax even if you don't itemize on the Federal.

What medical expenses can be included?  Co-pays and co-insurance for doctors, dentists, hospitals, labs, prescriptions, as well as contacts and eye glasses. Even mileage to medical appointments can help, though at a lower rate than business miles.

Your health insurance premiums are deductible ONLY if they are not already a pre-tax deduction through your payroll.  Check your pay stub or your payroll department to find out for sure.  Medicare B and COBRA premiums are examples of premiums that are not already pre-tax.  Long term care insurance can be included as a medical expense.  If you are self-employed, your health insurance premiums are a medical expense, but they get a more favorable treatment as an adjustment to your income.

What isn't deductible?  Over-the-counter medications, like cold medicine and tylenol, and first-aid items like band-aids and neosporin.  Plastic surgery is not allowed as a deduction.  Vitamins and nutritional supplements are pretty much never deductible (unless prescribed by a physician).  Your health club membership?  Nice try, but not a medical expense - even if your doctor tells you to exercise more!

More next time on Health Savings Accounts.