Last Minute Tax Savings With An HSA

In recent weeks, millions of taxpayers have been realizing the true impact of the Affordable Care Act as they file their tax returns. It’s probably no surprise the individual mandate required most Americans to have health insurance coverage as of January 1, 2014. If you had employer-provided health insurance coverage for most of 2014 or you purchased coverage through a private exchange or directly from an insurance company, the health insurance mandate will not have an impact your taxes.

However, there are growing reports of taxpayers being surprised to find out they have to pay back some or all of the advanced premium credit since their actual income for 2014 was more or less than the amount they estimated at the time they purchased coverage from the marketplace. Major life changes or higher than expected income could trigger the need to pay back some or all subsidies received. Of course, if income was lower than expected taxpayers may have paid too much and could be due a refund instead.

Other than diligently preparing tax returns as accurately as possible, there isn’t much you can do to change what already happened in 2014. But there is at least one last minute step that you may be able to take to lower your taxes related to health insurance. You might be able to  contribute to a health savings account (HSA).

Are you eligible to contribute to a health savings account? The first step toward participating in a health savings account is to participate in an HSA-eligible high deductible health plan. In general, a health insurance policy must have a deductible of at least $1,250 for individual coverage and $2,500 for family coverage (2014 limits). Annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) cannot exceed $6,350 for self-only coverage and $12,700 for family coverage. Many plans purchased on the exchanges are HSA-eligible.

HSA Eligibility and Contribution Worksheet

Reduce taxes now and build up savings to pay for health care now or later. Health savings accounts provide much needed protection to help pay for current and future health-related expenses. HSAs can also benefit you by lowering your income taxes. You can contribute up to $3,300 for individual coverage and up to $6,550 for family coverage for 2014. If you are age 55 or older, there is an additional $1,000 catch-up contribution.

Did you know that you can still contribute to your HSA if you didn’t already max out your contributions for the 2014 tax year? Since most people contribute to HSAs through the ease and simplicity of payroll deductions, it often goes unrealized that you have the ability to make direct contributions to an HSA outside of your employer by directly writing a check or setting up automatic transfers from your bank account. If you are making a last minute contribution to an HSA, just don’t forget to include contributions made by your employer during 2014 along with your contributions for the 2014 tax year when determining how much you can possibly add to your HSA. These lump sum or ongoing monthly contributions can potentially serve as a significant tax planning opportunity for HSA participants unaware of the additional time allowed to make contributions for the 2014 tax year outside of regular payroll deductions.

How do HSA contributions lower taxable income?

HSA contributions are considered an “above the line” deduction, which can help lower your adjusted gross income and potentially help qualify you for other deductions and credits that are income dependent. A key benefit of this tax deduction is that you do not have to itemize deductions to claim HSA deductions. Another key feature is that HSAs are also portable, meaning these are your funds and you can always take them with you if you change employers or transition to retirement.

Health savings accounts are unique in that they offer triple tax exemption. The money that you put into HSAs lowers your taxable income today, grows tax-deferred, and comes out of your account tax-free as long as you use it for qualified health expenses. With rising health care costs, this is a smart financial planning opportunity to consider if a high deductible insurance plan makes sense for you or your family’s situation.

What if you are healthy or don’t need access to your HSA funds? Health savings accounts differ from flexible spending accounts (FSAs) in that there is no “use it or lose it” provision. Therefore, you can continue to leave HSA funds in your account and let your balance grow from year to year. Health savings accounts can also provide a variety of investment options to maximize long-term growth potential.

Unlike deductible IRA contributions, health savings accounts do not have income limitations. As mentioned above, the main requirement to contribute to an HSA is that you have to be covered by a high-deductible health insurance plan with a health savings account attached to it during the 2014 tax year. Keep in mind that HSA contributions must be made by April 15 even if you are filing an extension.

There is nothing worse than getting a nasty surprise from Uncle Sam when filing your income tax return. Hopefully, the first round of tax filings under the individual mandate of health insurance coverage hasn’t been more than a check the box experience. But if you haven’t already completed your 2014 tax return, it’s not too late to take some final tax planning steps to reduce your tax bill. As you review your last minute options, don’t forget about HSAs when trying to lower your taxes. The often overlooked ability to make HSA contributions up until the tax filing deadline is an effective way to reduce your tax bill or boost your tax refund.

 

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