Bellevue & Redmond, WA Income Tax Preparation Services: Stephen Nelson, CPA

How Health Savings Account (HSAs) Save You Taxes

Since the beginning of 2004, taxpayers have had a new tax savings tool called Health Savings Accounts, or HSAs. And these Health Savings Accounts, or HSAs, are worth looking at seriously.

In a nutshell, HSAs work like this. You buy a special type of major medical, or catastrophic coverage, insurance called a High Deductible Health Plan. (This special HSA-compatible insurance is also known by the acronym HDHP.) Then, you contribute money--up to roughly $5,000 annually in the case of a family--to a special health savings account.

The benefit in all this is that you get a tax deduction for the money you contribute to the health savings account... but as long you spend the money in the account for eligible healthcare expenses, you aren't taxed when you withdraw the money. In effect, the HSA makes all or most of your uncovered healthcare expenses fully deductible. (This is a big deal because for most people, healthcare expenses are not deductible!)

Just to put the value of an HSA into perspective, a family can save from $500 to as much as $1750 annually in income taxes by using one of these accounts. And the accounts aren't difficult to set up. Essentially, you do just two things. (1) Get medical insurance that qualifies as an HDHP, and (2) Open an HSA account with a bank that offers HSAs. Note, too, that HDHP insurance may save people money, too, because you end up buying less insurance.

For what it's worth, I am now using an HSA myself. (I got my HDHP from Premera and use an HSA account from HSA Bank.) But let me also share two caveats: First, obviously, you never want to cancel one insurance policy until you're sure you have a replacement policy. Second, you do need to be careful about the fees associated with the HSA "bank account," so shop around...

If you're interested in learning more about how HSAs can save you taxes and you're a client, be sure to ask me about them next time we work together. If you're not a client, note that you should be able to get information about how HSAs work from your health insurer or from your current tax advisor.

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