HSA Tax Implications

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The HSA or health savings account is a type of account that allows you to save on a tax-advantaged basis for health care expenses. When you set up this type of account and began contributing to it, there will be some effects that it can have on your tax situation. Understanding these implications can help you take advantage of a powerful tax-saving tool.

Function

  • The health savings account allows you to set up a savings account with a bank and fund it specifically with money that you intend to use on medical expenses in the future, if needed. You can set aside money into this account and then when you have need of a qualified medical expense, you can use the money in your health savings account to pay for it. The bank will give you a debit card or a checkbook to access the account when you need it.

Saving Money

  • One of the advantages of the health savings account is that it allows you to set aside more money than you would normally be able to for health expenses. In a normal situation, if you had a doctor bill or some other medical expense, you would simply take money out of your personal account and use it to pay the bill. This is money that you have already paid taxes on. When you use a health savings account, you can fund it with pre-tax money. This allows you to save more money, instead of paying the government through taxes and then paying for your health care expenses with your take-home pay.

Taxable Income

  • The health savings account also affects your taxable income. 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.

Compounding

  • The health savings account also gets to take advantage of another tax benefit. The money that you put into your account can earn interest. Some health savings accounts allow you to choose different low-risk investments to put your money into. Others will pay you a fixed rate of interest on your money. 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.

Considerations

  • The health savings account allows you to take advantage of tax benefits in several ways. 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. In order to use this type of account, you must also have a high deductible health insurance plan.

References

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