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As the year comes to a close, many people are looking for ways to save on their taxes. One way is through deductions on qualifying expenses. Tax deductions worth considering — and that many people don’t know about — are contributions to a health savings account, a tax-advantaged savings vehicle for eligible medical expenses.
Your HSA contributions are subtracted from your income pre-tax, lowering your adjusted gross income. Your adjusted gross income then determines the total amount of itemized deductions, such as mortgage interest payments and property taxes, you can take.
But not everyone is eligible for an HSA. Only individuals and families with high-deductible health insurance plans are allowed to contribute to them. Let’s look at who can contribute and what the contribution limits are:
- If you are a single individual, and your medical plan has a minimum deductible of $1,300 and maximum out-of-pocket costs of $6,450, you can contribute up to $3,350 to an HSA in a given year. If you are age 50 or older, you can contribute an additional $1,000.
- If you have a family, and your minimum deductible is $2,600 and your maximum out-of-pocket cost is $12,900, you can contribute $6,650 to your HSA. If you are age 50 or older, you can contribute an additional $1,000.
Unlike other deductions, HSA contribution limits and deductions don’t phase out with higher income. And not only are contributions tax-deductible, but they also grow tax-free. You can invest the funds in your HSA in securities such as stocks, bonds and mutual funds. The distributions you take from your HSA are also tax-free, provided that you use the money for qualified medical expenses. Those include, but are not limited to, doctor copayments, prescriptions, surgical procedures and even some over-the-counter medicines.
Medical expenses are tax-deductible after they surpass 10% of your adjusted gross income. For instance, if your adjusted gross income is $100,000, the first $10,000 of medical expenses aren’t deductible, but any expenses beyond that are. With contributions to an HSA, you don’t have worry about meeting the 10% threshold because you deduct your contributions, not your expenses.
You still have time
Unlike the HSA cousin, the flexible spending account, you do not have to use all of your contributions in the year that you make them. If you have a family and you contribute the maximum $6,650 to your HSA, and you don’t use it in 2015, you can carry your balance forward into 2016. If you can, it pays to max out your contribution so you can build up your HSA for future use, especially if you anticipate bigger medical expenses in the coming year.
And just because it’s the end of the year doesn’t mean your time is up to contribute to your HSA. Contributions can be made by the due date of your tax return, excluding extensions, and will be deducted for that tax year. For instance, you can make a contribution to your HSA until April 15, 2016, and deduct it from 2015 taxes.
As you can see, HSA contributions can be a very powerful tax-saving tool and a smart way to cover your medical expenses. If you have an HSA, make sure you are making the most of it and review your 2015 contributions today.
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