Tax Tips & Calculators

The tax advantages of opening both of these include:

• Health savings accounts (HSAs) – Contributions are either tax­deductible or made with pre­tax dollars. If you´re making contributions that are tax­deductible, they´ll be deductible even if you don´t itemize.
• Flexible spending arrangements (FSAs) – No employment or federal income taxes are deducted from your contributions.

HSA

An HSA is a savings account used to pay out-of-pocket medical expenses. Contributions to your HSA are either of these:

• Tax­deductible, like deductible IRA contributions
• Made pre­tax if the HSA is offered through an employer´s benefit plan, like 401(k) contributions

Earnings in the account aren't taxed. Distributions used to pay for qualified medical expenses are tax­free.

To qualify to contribute to an HSA, you must have a high­deductible health plan (HDHP).
The HDHP:

• Must have a high deductible. For 2011, the minimum deductibles are $1,200 for self­only HDHP coverage and $2,400 for family coverage.
• Can´t pay medical benefits until the deductible is satisfied ‐ Ex: A medical plan that pays for prescription drugs or office visits without regard to the deductible isn´t a qualifying HDHP. However, exceptions exist for preventative or wellness benefits, like basic health check­ups, maintenance drugs, and cancer screenings.
• Must have a maximum annual out­of pocket expense that you can incur ‐. For 2011 the maximum out­of pocket expenses are $5,950 for self­only coverage and $11,900 for family coverage.

Other eligibility requirements:

• You can´t be a dependent on another person´s return.
• You can´t have any other type of health insurance coverage.
• You can´t be enrolled in Medicare.
• Certain coverage is allowed, including dental, vision, and long­term care insurance.

There´s no earned income requirement.

If you meet all of the requirements, you can contribute to your HSA for 2011 amounts up to:

• $3,050
• $6,150 if you have family HDHP coverage
• $4,050 if age 55 or older
• $7,150 if you have family HDHP coverage and are 55 or older

You can use your HSA funds tax­free to pay for out­of­pocket medical expenses, including:

• Doctors visits
• Prescriptions
• Over­the­counter medicines prescribed by your physician
• Laboratory tests
• Hospital stays

The HSA/HDHP combination is not for everybody because of the high deductible. If you are taking several prescription medications or if you expect to visit the doctor several times, you would have to pay a great deal out-of-pocket until your HDHP deductible is met. Or, you may not have enough to be able to fund an HSA.

But if your medical expenses are relatively low and you are able to contribute consistently to an HSA, consider all of these advantages in addition to the tax advantages:

• HSA funds are not "use or lose," unlike flexible spending accounts (FSAs). You may keep the funds in the account as long as you wish and use them only when you need to.
• Unlike Roth IRAs, there is no waiting period before you can begin taking tax-free distributions.
• You may be eligible for a 1-time rollover of IRA or unused FSA funds to help fund your HSA.
• HDHP premiums are often considerably lower than traditional health plan premiums. The lower premiums can mean you have additional funds to handle the HDHP deductible and fund the HSA.
• Employers may fund some or all of the HSA for you. Employer contributions are tax-exempt.

However, if you use HSA funds for some other purpose, the distribution is taxed at ordinary rates with a 20% penalty. This applies for distributions you make after Dec. 31, 2010 ‐ unless you become disabled, die, or reach age 65.

Since it has a high deductible, the HSA­and­HDHP combination isn´t for everybody.

Ex: You´d have to pay a great deal out­of­pocket until your HDHP deductible is met if you´re:

• Taking several prescription medications
• Expecting to visit the doctor several times during the year

Or with an HDHP, you might not have enough to fund an HSA.

However, if your medical expenses are relatively low and you´re able to contribute consistently to an HSA, consider these advantages on top of the tax advantages:

• HSA funds aren´t use it or lose it , unlike flexible spending accounts (FSAs). You can keep the funds in the account as long as you wish and use them only when you need to.
• You may be eligible for a 1­time rollover of IRA or unused FSA funds to help fund your HSA.
• You might be eligible for a 1­time rollover of IRA or unused FSA funds to help fund your HSA.
• HDHP premiums are often considerably lower than traditional health­plan premiums. With lower premiums, you might have additional funds to handle the HDHP deductible and fund the HSA.
• Employers might fund some or all of the HSA for you. Employer contributions are tax­exempt.

Health FSA

A health FSA is an employer­established benefit plan. Your employer can offer them with other employer­provided benefits as part of a cafeteria plan.

A health FSA allows you to be reimbursed for qualified medical expenses, including:

• Co­pays
• Eyeglasses
• Prescriptions
• Over­the­counter medicine (this allowance expires at the end of 2010 with the exception of insulin)

FSAs are usually funded through voluntary salary reduction agreements with your employer.

FSA benefits include:

• You can exclude contributions made by your employer from your gross income.
• No employment or federal income taxes are deducted from the contributions.
• Withdrawals might be tax­free if you pay qualified medical expenses
• You can withdraw funds from the account to pay qualified medical expenses – even if you haven´t yet placed the funds in the account.

To contribute to your FSA:

• At the beginning of the plan year, designate how much you want to contribute.
• Your employer will deduct amounts periodically – usually every payday – in accordance with your annual election.

You can change the amount you designate at the beginning of the plan year only if a specified event occurs, like:

• Marriage
• Divorce
• Birth or death of a child
• Loss of coverage under other insurance
• Change in employment status

You aren't taxed on the salary you contribute or the amounts your employer contributes to the FSA. However, you must include in your income any contributions made by your employer to provide coverage for long­term care insurance.

You usually forfeit money you contribute that you don´t spend by the end the plan year. So, the money is use­or­lose. However, some plans allow you an additional 2 1 / 2 months to use the money. Base your contribution on a reasonable estimate of the qualifying expenses you expect to have during the year. Due to the tax savings, an FSA might be advantageous even if you´ll have to forfeit a small amount of money.

You must provide the health FSA with a written statement from an independent third party stating that you´ve incurred the medical expense and the expense amount. You must also provide a written statement that the expense hasn´t been paid or reimbursed under any other health­plan coverage.

Dependent­Care FSAs

You can establish an FSA to pay for dependent care, like childcare. The amount you can set aside for dependent­care FSAs usually is limited to $5,000 a year.

Although you receive a tax advantage with a health FSAs, dependent care FSAs are a tradeoff between pre­tax deductions and tax credits, like the child and dependent care credit. The higher your income, the lower your child and dependent care credit usually is due to income phase­outs.