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How Tax-Savings Healthcare Plans Can Save You Serious Money

Health insurance and healthcare expenses can cost a fortune. If the IRS offers tax-incentivized plans, you need to take advantage of them. If not, it’s like throwing money away. In this article, we’ll look at three of the most popular tax-savings plans.

Employer-Offered Tax-Savings Plans

Your employer may elect to offer two additional tax-advantaged or pre-tax programs where you can deduct money from your paycheck before taxes, thus increasing your purchasing power and reducing your taxes. They are:

The premium-only plan (POP) that lets you pay for your monthly portion of the premiums pre-tax; and the Flexible Spending Account (FSA) that allows you to save money from your paycheck on a pre-tax basis toward medical expenses for the year.

You can consult tasconline.com, a company for employers providing flexible spending account administrative services, and search for eligible expenses for a complete list of eligible charges. Your employer will decide the amount you may save, up to a max of $2,650/year in 2018. Eligible expenses include your healthcare plan’s copays, deductibles, and coinsurance. Medications are covered as long as they are prescribed by your doctor. The catch with FSAs is that you have to either use the funds in the plan year or lose them to your employer. That sounds unfair, right? Well, maybe not.

The FSA rules allow you to access 100 percent of what you committed to save for the year at any time during the year, meaning you can access the full year before you have saved for it. Therefore, you need to accurately assess what your expenses will be to ensure you don’t waste your money. There has been a slight loosening of the “lose it” provision, and at this time, you can carry $500 forward into future years.

There is no reason for you not to take the POP plan and reduce your cost of the monthly premium. You should be aware, though, that if you elect to take the POP, you cannot drop the health coverage until the next open enrollment unless you have a qualifying life event (QLE). The FSA, likewise, is an excellent way to reduce your costs if you know which medical expenses you will be incurring in the coming year. Why pay more for the services or more to the government in taxes?

Employer/Individual Tax Incentive Plans—Health Savings Account

Health Savings Accounts (HSAs) are available in both the individual and employer markets if you have elected a High-Deductible Health Plan. High-deductible health plans with HSAs do have minimum deductible and maximum out-of-pocket expense requirements for individual-only and family coverage. The 2019 levels are as follows: $1,350 for individual coverage and $2,700 for family coverage, in terms of the minimum annual deductible. The maximum annual deductible and other out-of-pocket expense limits are $6,750 for individual coverage and $13,500 for family coverage.

The following are the benefits of an HSA:

You can claim a tax deduction for contributions you, or a party besides your employer, make to your HSA even if you don’t itemize deductions on a Schedule A (Form 1040).

Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

The contributions remain in your account until you use them. The interest or other earnings on the assets in the account are tax free. You can save tax free and distributions may be tax free if used to pay qualified medical expenses.

An HSA is “portable.” It stays with you if you change employers or leave the workforce.

HSA Contribution Limits

For individuals buying insurance directly, HSA regulations allow you to legally reduce federal income tax up to $3,500 a year for individuals, or $7,000 for families, into a health savings account for tax year 2019, as long as you’re covered by an HSA-qualified HDHP. There’s no minimum deposit, but whatever you put into your account is an “above the line” tax deduction that reduces your adjusted gross income. Just like IRAs, HSA contributions can be made until April 15 of the following year.

Account holders who are fifty-five or older are allowed to deposit an additional $1,000 in catch-up contributions (this amount is not adjusted for inflation; it’s always $1,000).

For people with employer-sponsored HDHP/HSA accounts, they can deduct up to the same amounts from their payroll before taxes are taken out.

Using Your HSA Funds

You can use the tax-free savings in your HSA to pay for doctor visits, hospital costs, deductibles, copays, prescription drugs, or any other qualified medical expenses. Once the out-of-pocket maximum on your health insurance policy is met, your health insurance plan will pay for your remaining covered medical expenses.

If you switch to a health insurance policy that’s not HSA-qualified, you’ll no longer be able to contribute to your HSA, but you’ll still be able to take money out of your HSA at any time to pay for qualified medical expenses, with no taxes or penalties assessed.

If you don’t use the money for medical expenses and still have funds available after age sixty-five, you can withdraw them for non-medical purposes with no penalties, although income tax would be assessed at that point, with the HSA functioning much like a traditional IRA or 401(k). A list of qualified medical expenses is available on the IRS website, www.irs.gov, in IRS Publication 502, “Medical and Dental Expenses.”

Where Is My Account?

HSA bank accounts can be offered by your employer with easy payroll automatic deposit features, or you can set up an HSA account at one of the many participating banks throughout the country.

They are a great way to offset medical expenses on a pre-tax basis, and save tax-free for future medical or retirement expenses.

Individual Premium Tax Deduction

Additionally, if you’re not on an employer plan, you don’t qualify for subsidies under individual insurance and you itemize deductions on your tax returns, you can deduct qualified medical expenses that exceed 7.5 percent of your adjusted gross income for 2018. Beginning January 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceed 10 percent of their adjusted gross income. This includes health insurance premiums.

If you’re self-employed and have a net profit for the year, you may be eligible for the self-employed health insurance deduction. This is an adjustment to income, rather than an itemized deduction, for premiums you paid on a health insurance policy covering medical care, including a qualified long-term care insurance policy covering medical care for yourself, your spouse, and dependents.

In addition, you may be eligible for this deduction for your child who is under the age of twenty-seven at the end of 2017 even if the child wasn’t your dependent. See chapter 6 of Publication 535, Business Expenses, for eligibility information. If you don’t claim 100 percent of your paid premiums, you can include the remainder with your other medical expenses as an itemized deduction on Form 1040, Schedule A.pdf.

Remember, you need to get professional tax advice on your specific situation.

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