Navigating the Tax Advantages of Health Savings Accounts (HSAs)

Clipboard with health savings account list on it.

A Health Savings Account (HSA) is a tax-advantaged account that individuals can use to save and pay for unreimbursed medical expenses. They have become a popular vehicle of financial planning for individuals with high-deductible health plans. This is because they not only offer a convenient way to set aside funds for medical expenses but also come with significant tax advantages. But, oftentimes our CPAs see that individuals do not understand the bounds within which they can benefit, or, because they do not partner with a CPA, to know how to go about it.

In this article, we take a look at some of the key things to know about HSAs and their tax benefits.

Navigating tax advantages of Health Savings Accounts

When it comes to tax benefits, the biggest one is that contributions made to an HSA are tax-deductible. This means that the money you set aside for health savings isn’t included in your taxable income for the year, ultimately reducing your overall tax liability. But, while the tax benefits are enticing, it’s crucial to be aware of regulations and limits set by the IRS. Overcontributing can lead to unexpected tax penalties.

2023 and 2024 HSA contribution limits

Staying informed about contribution limits can help you make the most of the tax advantages without exceeding the allowed thresholds.

In 2023, the HSA contribution limits are $3,850 for self-only coverage and $7,750 for family coverage, with an additional $1,000 catch-up contribution for those 55 and older. Looking ahead to 2024, these limits increase to $4,150 for self-only coverage and $8,300 for family coverage, with the same catch-up contribution option.

HSA eligibility

Individuals may establish and contribute to an HSA for each month that they are covered under an HSA-qualified high-deductible health plan, do not have disqualifying coverage, and cannot be claimed as a dependent on another person’s tax return.

To contribute to an HSA, you need to be enrolled in an HSA-eligible health plan. For 2023, this means having an annual deductible of at least $1,500 for self-only coverage and $3,000 for family coverage. Additionally, the out-of-pocket maximum should not exceed $7,500 for self-only coverage and $15,000 for family coverage.

HSA contribution deadline

Contributions to an HSA can typically be made until the tax filing deadline. For tax year 2023, you can contribute until April 15, 2024. It is important to adhere to this deadline to avoid penalties and maximize your HSA contributions for the given tax year. If you aren’t enrolled in an HSA-eligible health plan for the full year, consult with your CPA to help you calculate a prorated contribution amount.

HSA tax penalties

While HSAs offer valuable tax benefits, they also come with potential tax penalties. Exceeding the annual maximum contribution limit may result in a 6% excise tax on excess contributions. Using HSA money for ineligible expenses can lead to a 20% penalty plus applicable income taxes if you’re under 65. But those 65 and older can use HSA money for ineligible expenses penalty-free, just note that income taxes would still apply.

HSA vs. Health Care FSA

Comparing HSAs to Health Care Flexible Spending Accounts (FSAs), it’s possible to contribute to both. This is provided that the FSA is “HSA-compatible.” This allows individuals to save for qualified medical expenses using both accounts. However, HSAs have the advantage of not being subject to the “use it or lose it” rule. This means contributions can be saved and invested year over year.

Also, read about Healthcare Tax Deductions.

Partner with experts

Health Savings Accounts offer a powerful combination of savings and tax advantages for individuals with high-deductible health plans. Understanding the rules, contribution limits, and investment opportunities can empower you to make the most of your HSA for both immediate and future financial needs. Beyond traditional savings, HSAs can also play a role in your investment strategy. This is because the earnings on these investments are tax-free as long as they are used for qualified medical expenses. This adds a layer of financial flexibility and growth potential to your HSA savings strategy. But, navigating the intricate details of HSAs and maximizing their benefits can be daunting. It is advisable and beneficial to partner with a CPA to help you manage your HSA finances and ensure compliance. Contact us to assist today!

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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.