The end of the year is the perfect time to take a look at your tax plan and consider if there are any opportunities to decrease what you will owe. Contributing to a Health Savings Account (HSA) is one step that can help you save money and minimize your taxes. The funds roll over year to year, so don’t be afraid to set one up now! Here are some details on HSAs and who qualifies to contribute to one.
Three Advantages of HSAs:
Contributions are tax-deductible (or taken from pre-tax earnings)
Any interest or dividends from an account are tax free
Distributions for qualified medical expenses are tax free
HSA v FSA
Don’t confuse an HSA with an FSA (Flexible Spending Account). Both can use pre-tax dollars to offset medical expenses. FSAs are employer owned and typically "use it or lose it", with funds expiring at the end of the calendar year. HSAs are owned by the individual and roll over year after year.
Qualifying for an HSA
An HSA is a tax-advantaged account available to individuals enrolled in a qualifying high deductible medical insurance plan. The IRS defines that plan as any with a deductible of at least $1,400 for an individual or $2,800 for a family. HSAs are typically offered by employers in conjunction with a high deductible plan or used by self-employed individuals who have high deductible plans. If one of these plans is your only form of coverage, then you are eligible for an HSA and should take advantage of the savings offered.
HSA Qualified Expenses
HSAs are set up to cover medical expenses, but the list of approved expenses may surprise you. The CARES Act passed in 2020 added coverage for over-the-counter medications, menstrual products, and alternative treatments (with diagnosis), to name a few.
HSA Contribution Limits
There are two different contribution limits. If it's an Individual plan, the 2021 contribution limit is $3,600. If it's a Family plan, the 2021 contribution limit is $7,200. (*Increasing in 2022 to $3,650/yr. and $7,300/yr.)
Example: A household with a family plan falls into the 32% tax bracket and decides to max out their HSA. This will result in a tax savings of $2,304 this year.
HSA Investments
A lot of HSAs allow you to invest at least part of your account balance. This can be especially useful for people who don't need to use their HSA to cover current medical expenses, building a reserve for later use. If invested appropriately, that $3,600 or $7,200 contribution could double or triple over the years to be withdrawn tax-free for expenses in the future or to reimburse for previously paid medical expenses.. This will not only help you today, but tomorrow too!
Taking advantage of an HSA might be an easy way to minimize your 2021 taxes. You should also consider examining your 401(K) contributions or using a tax-loss harvesting technique. Year-end tax planning is just one aspect of a comprehensive financial plan that helps you build your wealth for the future. Merino Wealth can help you navigate the complexities and opportunities that are unique to your situation. Get Started with our team today!