Savings Tax Breaks for Middle America – Health Savings Accounts
Over the decades Congress has legislated a significant number of breaks for Middle America into the tax law. Despite numerous rounds of tax reform there are several major savings tax breaks that have been protected from elimination. In this series of posts I will introduce to you the four major tax breaks targeted at improving savings for specific major living needs.
My aim is to build your awareness of these breaks and what they can do to improve your financial situation. These savings can be used to reduce your financial risks.
The four major incentives or what I call "The Big Four" were created to encourage individuals to increase the amount of their savings to pay for health care costs, fund education, and pay for the later years of life or the Fulfilling Stage of the FinancialVerse. There has been one major problem that has not made these incentives as effective as possible in increasing savings. That problem is that most people not are fully aware of them and don’t understand how they can help them build a better financial situation.
The Big Four are:
Health Savings Accounts (HSAs)
Individual Retirement Accounts (IRAs)
Section 529 College Savings Plans
The Big Four provide various tax incentives such as deductibility from current taxation for amounts contributed, tax deferral on earnings, or tax-free earnings.
Health Savings Accounts (HSA)
Only an estimated 22 million Americans have chosen a HSA coupled with a consumer-directed health plan, according to a 2018 survey from America’s Health Insurance Plans.
An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical and dental expenses. The entire amount deposited is tax-deductible on returns for that year, even for filers who do not itemize their deductions, subject to certain limits. There are no income limits, however, on who can establish an account.
By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you can lower your overall health care costs. This includes medical and dental costs. You can also accumulate funds in an HSA for use later in life to pay for the medical costs at that time. Remember most couples over age 65 are looking at having to pay over $280,000 in health care costs for their later years according to the most recent study by Fidelity Investments. An HSA can help offset that burden.
To make the tax breaks clear - the tax benefits for those qualifying and using an HSA are twofold. First, taxpayers get a tax deduction (subject to the limits for their contribution) and second- they can withdrawal the funds, including earnings, tax free if they are used to pay for qualifying medical and dental costs. Another longer-term benefit is that the amount in an HSA can be left on deposit and allowed to accumulate on a tax-free basis into retirement. This can allow you to have a source of funds to offset the higher medical costs of aging.
The HSA restrictions for 2019 are as follows:
An HSA can be used only if you have what is called a high-deductible health plan (HDHP)—which is generally any health plan (including an Obamacare/Insurance Marketplace plan) with a 2019 deductible of at least $1,350 for an individual or $2,700 for a family. The IRS sets and changes these deductible amounts each year. When you purchase health insurance plans, they are usually designated as “HSA-eligible.”
Some health insurance companies offer HSAs for their high-deductible plans. Check with your health insurance company for their offerings. You can also open an HSA through some banks and other financial institutions.
HSAs may not be for everyone. They are not used by enough consumers, however, despite the valuable tax benefits granted by Congress. This product offers great tax benefits and can help offset the costs of illness. Stayed tuned for Part 2 – 401(k)’s in our next post.