When it comes to taxes, one thing is certain — paying less is usually a good thing. Most of us don’t know how much we will owe or receive as a refund until we have filed a return. The two basic ways to reduce your tax bill is through tax credits or deductions. Today, we are looking at the second option and how your health savings account (HSA) may help.
What are tax deductions?
Before diving into your health savings account (HSA), it helps to understand what tax deductions are and how they save you money.
The first step is adding all the income you received for the year. After that, the IRS allows you to subtract certain things to reduce how much of your income is taxable.
Next, you choose one of two options: itemize or take the standard deduction. Last year’s tax law changes nearly doubled the standard deduction. Because of this, itemizing won’t likely offer you the biggest discount.
Picking the standard deduction means your itemized deductions are no longer relevant. If you were hoping to deduct mortgage interest or your property taxes, you are out of luck. This isn’t necessarily a bad thing — it just means they are no longer part of the calculation.
The good news is, your HSA deduction stays intact regardless of which option you choose. That’s because it’s not part of your itemized deductions and subtracted during the first step.
How does the health savings account deduction work?
If you are looking for deductions, health savings accounts (HSAs) have several guidelines. The most important is when you can contribute. You are only eligible to make HSA contributions if you have a high-deductible health plan.
In 2019, these plans have a deductible of at least $1,350 for an individual or $2,700 for families. The most you can pay out-of-pocket — including deductibles, copayments, and coinsurance — is $6,750 and $13,500 for individuals and families.
As you may imagine, health expenses add up fast. To offset the cost, the IRS allows you to deduct HSA contributions. This deduction happens during step one of your tax return, as outlined above.
The deduction can happen in a couple of different ways. If you are a W-2 employee and part of that money was set aside into an HSA, you will see it on that form. You will also receive a copy of Form 5498-SA from your HSA provider. This will show your total contribution for the year, before or after taxes.
Regardless of which type of HSA contribution you make, there is a spot to deduct it on Form 1 of Schedule A. As proof, you will need to attach Form 8889. This move directly reduces your taxable income.
Stay organized to claim health savings account tax deductions
If you have ever been stuck with a high-deductible health plan, you know how expensive it can be. Contributing to a health savings account is one way to ease the financial burden. It may not offset your out-of-pocket costs, but it can offer a valuable tax deduction. By knowing the rules and important forms, you will stay one step ahead before tax time.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.