Would you open saving
account in which doesn’t need to pay income tax?
It’s definitely yes for
me. A health savings account (HSA) is a tax-free savings account for U.S.
taxpayers who are enrolled in a high-deductible health plan (HDHP). Basically,
it is the saving account that you or your employer can deposit money in every
year. You can use this account to pay for your medical expenses. For example,
you deposited $3,000 in 2015 and you went to see the doctor. You need to pay
$1,000 as deductible to the hospital. You withdraw $1,000 from your HSA account
to pay the bill. Now, your HSA balance is $2,000 ($3,000-$1,000) that can be used.
HSA balance is roll over and accumulated year to year if it is not being used.
The good thing is that the money that you deposit in your HSA account each year
can be deducted from your income so it will reduce your tax liability.
When you file your tax
return each year, you can reduce your income by subtract amount that you
deposit to your HSA account that year. It is located in 1040 form, item number
25 (for tax year 2015). The label is “Health savings account deduction” as
figure 1 below.
Figure
1: 1040 Form, item 25 (for tax year 2015)
Let’s do the math. Assuming
that you are single, earn $50,000 and deposit $3,350 in your HSA account in
2015. Please see figure 2 below for this example. We are going to compare
between No HSA and with HSA to see how much we can save. First, you are single
so we will use Standard deduction $6,300 (line 2) and Personal Exemption $4,000
(line 3) to make it easier for calculation. The different is at line 4 which is
HSA amount; $0 vs. $3,350. Second, we will apply the taxable income equation.
Taxable income = income
– standard deduction – exemptions – HSA
No HSA
|
HSA
|
||
1
|
2015
Income
|
$50,000.00
|
$50,000.00
|
2
|
Standard
deduction
|
($6,300.00)
|
($6,300.00)
|
3
|
Exemptions
|
($4,000.00)
|
($4,000.00)
|
4
|
HSA
|
$0.00
|
($3,350.00)
|
5
|
Taxable income
|
$39,700.00
|
$36,350.00
|
6
|
Tax
|
$5,725.00
|
$4,995.00
|
7
|
Tax saving
|
$730.00
|
Figure
2: 2015 Tax Calculations
Finally, we will use
the taxable income to calculate the total tax. In this example, I used TaxAct and
TurboTax online income tax calculator to get the result on line 6. Luckily,
both produced the same results. As you can see that you would pay less tax for
2015 if you had HSA. Total saving is $730 (line 7) plus you would have $3,350
extra for your future health expenses.
Things you need to
know.
1.
HDHP. You need to have the
high-deductible health plan (HDHP) in order to participate in the HSA program.
When you purchase health insurance from market place, you need to make sure
that you select the plan that eligible for HSA. Mostly, bronze plan is
eligible.
2.
There is an annual limit amount that you
can deposit to HSA based on your status. For example, the deposit limit for
single is $3,350 and family is $6,750 for year 2016. All deposits to an HSA
from both employee and employer count toward the annual limit.
For
example, year 2016, single: $3,350
<= employee deposit + employer deposit
3.
If you reach age of 65 or become
disabled, you can withdraw money from HSA for non-medical expenses without a
20% penalty. However, you still need to pay income tax for that amount.
4.
Investments: you can use money in your
HSA to invest. Investment earnings are not subjected to income tax unless you
withdraw for non-medical expenses. This is another advantage for having HSA.
Let’s say, you have $10,000 in your HSA. You keep $5,000 in the saving account
for your medical expenses and you keep another $5,000 in the investment funds. If
your funds are increased in value 10%, you would earn $500. You have $10,500 in
total and no tax is paid at the time you earn.
Historical data
compiled for single/individual: 2004-2017
Figure
3: Deposit limit, Min deductible, Max out-of-pocket for single since
2004-2017
Historical data
compiled for Family: 2004-2017
Figure
4: Deposit limit, Min deductible, Max out-of-pocket for Family since 2004-2017
Based on the charts
above, you might notice that the deposit limit increase almost every year for
both individual/single and family. IRS adjusts limit based on inflation rate
each year which is good for us if we rarely use HSA for medical expenses
because we are healthy. Investment profit from this account is tax-free.
This article should
give you a basic understanding about HSA; you can read this guidebook link for more detail. It should give you an idea or provide an option
for you to manage your hard-earned money.
The information
presented hereupon is provided for informational purposes only and should not
be interpreted as tax or legal advice. The information presented here has been obtained from IRS
publications. Always consult a qualified tax planning advisor.
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