One of the most under utilized tax strategies by small business owners is the use of a Health Savings Account (“HSA”), and its critical that taxpayers consider their options when purchasing insurance during the Enrollment Period (November 15th to February 15th).
HSA plans are still alive and well under Obama Care as a tax-favored savings account combined with a qualifying high-deductible health insurance plan. It allows taxpayers to get a tax deduction for their health care expenses on the front page of their tax returns, the unused portions grow tax free, distributions are tax-free for health care expenses, and if you don’t use it for health care, you can use it like a typical IRA after 59 and ½.
These little gems are amazing. Get a tax deduction, the money grows tax free, and comes out tax free for almost any medical expense…you can even self-direct your HSA and buy that cute little piece of real estate at auction down the street- Unbelievable!! To know what medical expenses qualify under an HSA, check out the LONG LIST in IRS Publication 502.
The only catch: in order to get a deduction during 2015, you have to have a high-deductible health insurance policy (“HDHP”) in place before the Enrollment Period is over (there are options during 2015 to get an HSA plan if you have a “Qualifying Event”- a whole other topic. Visit www.healthcare.gov for more information).
For those of you that had a high deductible plan in place during 2014, you can still create and fund the HSA up until April 15, 2015, and take the deduction on your 2014 return.
The deduction for 2014 is $3,350 if you are single, and $6,550 if you are married.
Created by Congress in 2001, in my opinion, these may also be the most underutilized tax-savings strategy in the U.S. today. Here’s a sampling of some of the benefits of HSAs:
– You save on taxes. Not only are HSAs pretax accounts, but contributions to them are deductible from your gross pay amount on the front page of your tax return, potentially putting you into a lower tax bracket.
– You can also spend the money tax-free. The caveat is that the money must be spent on qualifying health care expenses. The better news is that this tax-free rule on spending applies for the rest of your life. As long as you’re using the money for health expenses (and odds good that are you’ll have those when you’re older), in your retirement years your HSA could essentially act like a Roth IRA, in that, like a Roth, withdrawals after retirement are not taxed.
– You can save money on insurance premiums and health care costs. The HSA qualifying health insurance policy by its very nature has a lower premium and saves your business hard earned profits. Moreover, the ability to pay cash for health care costs allows you to negotiate for lower cost services and motivates us to be more healthy.
– An HSA can help pay for your retirement. After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses, and then pay federal income taxes on it. The HSA then acts much like a traditional IRA since the HSA holder pays ordinary income taxes on nonmedical-related withdrawals, with the added perk that you don’t have the mandatory disbursements usually required by traditional IRAs.
– An HSA can be an investment vehicle. HSAs allow you to invest the money in much the same way you invest an IRA. You can even invest HSA funds in real estate. So your health-care savings could also help you buy a rental property. It’s generally advisable, though, to stick more with liquid investments if you have a health condition or are at risk of developing one; you want the money available in case of a medical emergency. These accounts survived the recent federal health-care reform changes — the biggest overhaul of the health-care system since the 1960s, so it seems a safe bet that they’ll be around – and available to save you money – for years to come.
If you have more questions about a Health Savings Account, please call and speak with Merichia in our office to schedule a call with one of our CPAs at 435-865-5866 or visit us at www.ke-cpas.com.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the book “Lawyers are Liars- The Truth About Protecting Our Assets”, and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.