Health Savings Plans & their effect on taxes

What is a Health Savings Plan and how would it affect my income taxes?

A HSA basically work like this:

You and/or an employer put money into your HSA account (the account can be set-up through your employer as a benefit or you set up an account through a private company like an insurance company).

The amount of money that you contribute to your health savings account is deducted from your total income for the year.

When this is done, your taxable income for the year is lowered.

This lowers your overall tax liability and it could potentially put you in a lower tax bracket.

You might get a bigger refund or have to pay less taxes, depending on your situation.

If you want to use this type of account, you have to follow the rules associated with it.For example, if you are single, you can contribute a maximum of $3,050 per year.

If you are married, you can contribute a maximum of $6,150 per year.

The limits are indexed for inflation and adjusted each year.

Unspent money in your HAS can be rolled over each year, this means that money you do not use now can be saved—tax-free—to pay for future medical expenses.

To qualify for an HSA, you must be under age 65 and carry a high-deductible health insurance plan.

If you have a spouse who uses your insurance as secondary coverage, he or she also must be enrolled in a high-deductible plan.

This high-deductible health insurance plan must be your only health insurance coverage—you can’t be covered by other health insurance.

However, having dental, vision, disability and long term care insurance doesn’t disqualify you from having an HSA.

Your money sits in the account like it would in a bank account, except the money was placed in there tax-free and may earn more interest than in a bank account.

Regardless of how your account makes money, you will not have to pay taxes on the interest that you earn.

This allows your account to grow tax-free for many years if you do not use the money.

When you need to use your money to pay for qualified medical expenses (you need to pay for a prescription, dental check-up, co-pay on your current insurance, etc) you may be provided a debit card to pay for the expenses automatically or your plan may require you to send them a copy of the receipt and they will reimburse you with the money in your health savings account.

However, if you withdraw funds for non-medical expenses before you turn 65, you have to pay taxes on the money and a 10 percent penalty.

If you take money out after you turn 65, you don’t have a penalty, but you must still pay taxes on the money.

Additional information can be found at:

• http://www.irs.gov/publications/ p969/index.html

• http://personalinsure.about .com/od/health/a/aa022807a.htm

• General Explanation of a Basic HSA Plan at eHow.com

Questions for Deborah Ritz can be e-mailed to The Weekly Adirondack at WeeklyADK @yahoo.com