RBA USA

The U.S. Treasury Department estimates that 40 million to 45 million Americans will utilize tax-free health savings accounts as part of their insurance plans by 2010. That could add up to a lot of confused tax filers. Here are answers some common questions about HSAs.

What are the tax benefits of owning a health savings account?

You can put in amounts equal to your insurance deductibles, and the money can grow with tax-free interest during the healthy years. Should you have major bills in one year and you maximize your deductibles, the money is there when you need it. As the money grows it can be accumulated for retirement to pay the extra medical bills that come with age. Thus, the money is tax-free going into the account and tax-free when taken out, as long as it used for medical purposes. In the short term, you get the money tax-free without the inherent limits of meeting the 7.5 percent threshold in order to include medical expenses on your itemized income tax return.

How does an HSA owner determine the maximum tax-free contribution?

It is based on the kind of coverage you have, whether it is for self or family. The maximum allowable by law is $2,850 for individuals and $5,650 for families for 2007. Usually you want to choose your High Deductible Health Plan with corresponding out-of-pocket maximums, but this is no longer required under the law. The filer may make these contributions at any time during the year, either in installments or all at once, even on the last day of the tax year.

What kinds of contributions and distributions can a filer claim, and how are they reported?

The taxpayer reports the total contributions to his plan for the year (with after-tax dollars) and also reports the distributions that are made for bona fide medical expenses. There is no additional reporting, other than a simple line input in most tax software programs. If there are withdrawals/distributions made for something other than medical expenses, there will be penalties associated with those expenses.

What is the most common mistake people make with HSAs and taxes?

Claiming the contribution twice is a common mistake. The employer might deduct the money from the paycheck "pre-tax" and then the employee might take the deduction on his tax return as well.

What to learn more about HSA? Go to Q&A - What is an HSA?