It's Not Too Late to Fund Your 2019 Health Savings Account (HSA)
January 28, 2020
Whether or not you have already filed your 2019 taxes, we can all agree to share the same goal when it comes to it: we want to pay fewer taxes this year than in the previous year. The good news is that there are some strategies you can use to lower your tax burden, so it pays to give the following a try. One of them is a Health Savings Account (HSA).
What is an HSA, and how does it work?
An HSA is a type of tax-exempt saving account. It allows qualified individuals to set aside pre-taxed money for qualified medical expenses that are not covered by health insurance. Contributions to health savings accounts (in general, up to a predetermined limit) are not treated as taxable income. These contributions can accumulate over time, and, in many cases, you have options to invest the accumulated amount.
Any interest, income, or capital gain is also exempt from taxation. Withdrawals from the savings account are not subject to tax when used for medical expenses (including prescription medication). The great advantage of having an HSA is that the monthly premiums are almost always lower than that of a traditional health insurance plan. In addition to contributions being tax-free, money that you don't withdraw from the HSA can immediately be invested for added growth and carried forward indefinitely.
Not everyone qualifies to have an HSA. You are eligible for an HSA if:
· You are covered by a high-deductible health plan (HDHP).
· You are not eligible for other insurance besides the HDHP.
· You aren't enrolled in Medicare.
· You are not claimed as dependent on someone's federal tax return.
Each calendar year, the limit amount you can contribute to your HSA changes. In fact, the amounts have gradually increased from year to year and differ based on your health insurance coverage. In 2020, individuals with self-employed health insurance coverage can contribute up to $3,550. Individuals with a family health plan can contribute up to $7,100. In 2019, the contribution limits were $ 3,500 / self-only and $ 7,000 / family. Self-only coverage means that you are the only person covered by your plan. Remember, you can make contributions to your HSA until April 15, 2020 and still deduct it on your 2019 Tax return.
Being able to contribute to the prior year gives you more time to maximize your HSA. Maybe you got a bonus in December or some money over the holidays you can use that will boost your contribution. It might not be the most exciting way to spend your bonus or holiday gift from Aunt Debbie, but you won't regret it. If you're looking at your HSA as a tool in your comprehensive retirement strategy, time is your biggest strength. Even an small addition can make a difference in 10, 20, or even 30 years from now.
If you're dreading a potentially high tax bill in April, remember there's still time to take some action to minimize what you might owe. Use the next few months to take advantage of any tax deductions available to you. An HSA is an excellent option if you're eligible because the contributions typically are tax-deductible for qualified medical expenses. There's also the bonus of not paying taxes on money coming out if withdrawals are used for qualifying medical expenses. If you have a high-deductible healthcare plan, you can use the money in your HSA to pay your deductible, which will reduce your out-of-pocket costs.
So, if your HSA isn't funded to the maximum contribution limit, consider setting aside as much money as possible between now and the tax-filing deadline in April to hit that threshold and reap the highest tax savings you can. Learn more about HSAs in IRS Publication 969.
Bounds Accounting & Tax Services, LLC offers tax preparation and planning services for individuals, businesses, trusts, and non-profit organizations. We will work with you to minimize liabilities and maximize returns. Contact us and let us take care of your tax needs, personal or business, so you can focus on what's important to you!