Don’t Make These Costly Mistakes with Your Health Savings Account
Editor’s note: Do you have a Health Savings Account? If so, we have a few tips when it comes to your HSA contributions, rules for using the account and health savings account taxes.
What Are Health Savings Accounts?
Health Savings Accounts (HSAs) are a great way to help ease the pain of costly medical bills that are not covered by insurance. These accounts are available to people with high deductible health plans (HDHPs) and can be used to fund unreimbursed medical expenses with tax-deductible savings.
The Top HSA Tax Tips – What Should You Avoid?
While HSAs are a very valuable benefit, sometimes they can be confusing. Ultimately, taxpayers may miss out on thousands of dollars of tax deductions. Here are some HSA tax tips, including what to avoid:
- Forgetting that HSA contributions can be made until the tax deadline of the following year. One of the great things about HSAs is that contributions can be made retroactively for the previous tax year before the federal tax deadline. So those who were unaware of HSAs can still claim the tax benefit for the previous tax year by setting up an account and making a contribution, so long as they held a high deductible health plan. Then, HSA participants may use HSA funds to pay directly for or reimburse themselves for qualified medical expenses.
- HSA contributions can be rolled over. An HSA started through a former employer can still be used to pay for eligible medical expenses. It can also be rolled over into your current employer’s HSA (or any financial institution that services HSAs). However, you cannot combine HSAs with two different owners, so if you and your spouse each have a separate account, they can’t be combined.
- Not considering HSA retroactive reimbursement. Many people wonder, “Can you contribute to an HSA for prior years?” No. HSA funds can also be used for reimbursable medical expenses incurred in the current and subsequent years. This means that someone who has incurred a large medical bill can essentially make two years’ worth of contributions to their HSA to pay for it, if they do so in time. In addition, those planning a medical procedure in the future that is not reimbursable can double their maximum HSA contribution before the tax deadline by applying it to two tax years. The HSA must have been started before the expense incurred, but the funds don’t need to be contributed ahead of time.
- Making ineligible purchases with your HSA card. Non-medical withdrawals from an HSA account must be reported to the IRS and are subject to tax and a 20% penalty. So, don’t ever use these funds for anything other than qualified healthcare purchases. (Sorry, no beach vacation is in the cards.)
- Confusing HSAs with employer-sponsored FSAs. When people are used to using their employer’s Flexible Spending Account (FSA), they might assume that their HSA works the same way. HSA plans allow the full account balance to be carried over to the next year, unlike an FSA where contributions largely work on a “use it or lose it” system.
- If you overcontribute to the HSA. If the amount you contribute to your HSA exceeds your contribution limit, the remedy is this… You should remove the excess HSA contributions plus earnings before the tax return due date (including extensions).
Avoid Classic Health Savings Account Mistakes
By not getting tripped up by HSA tax reporting and structure, you and your family can use this valuable benefit to significantly reduce the cost of your medical expenses.
Get up to speed on the HSA tax tips listed above, and you should be set!
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