• April 2016

Are You Being Tax-Smart About Your Healthcare Expenses?

By Wade Brittingham
Financial Adviser
Egan, Berger & Weiner, LLC

Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are two great ways to lower your tax bill with Uncle Sam each year — plus save money on out-of-pocket healthcare expenses.

As a general guideline, healthy individuals and families should be using a HSA with a high-deductible health plan. Singles and families with ongoing health issues or chronic illness should use the FSA. To make access to these funds easier, you will be issued a VISA debit card.

Do you understand the tax benefits of these accounts? Can maximizing your contributions lower your income tax bracket?

Let’s take a look at the details inside each account.

Health Savings Accounts (HSAs)

In 2004, HSAs became available through employer benefits and only available to people who have a high-deductible health plan (HDHP) at work.

  • You must meet deductible limits of $1,300 for singles and $2,600 for families.
  • In 2016, the contribution limits are:
    • $3,350/year for singles,
    • $6,750/year for families, and
    • a catch-up for people over age 55 of $1,000/year.
  • Your pre-tax contributions are deposited inside your HSA, and withdrawals are 100 percent tax-free.
  • In addition, money inside your HSA can be invested in mutual funds, and these funds have potential to grow year to year (if not used).
  • Another added bonus is that funds may be used for retirement if they aren’t used for medical expenses.

Flexible Spending Accounts (FSAs)

FSAs allow you to contribute money from your paycheck pre-tax — before Uncle Sam takes his cut.

  • Withdrawals for your deductibles and qualified medical expenses are 100 percent tax-free.
  • In 2016, you may contribute up to $2,550/year from your pay.
  • However, only $500 is available to carry over if not used.
  • There are several types of FSA accounts, but for simplicity’s sake we won’t go into those details in this article.

Note: Previously, these plans worked under a “use it or lose it” function, meaning any funds not used during the year would be lost. This was unpopular, so a change was made to allow employees to carry over up to $500 of unused funds to the following plan year. But be careful! Do not contribute funds to this account unless you know they will be spent.

The Bottom Line

Paying for out-of-pocket healthcare expenses from an HSA or FSA will save you money and potentially lower your earned income each year. Both accounts offer two big tax advantages: pre-tax contributions and 100 percent tax-free withdrawals for medical expenses.

Choosing the one that’s right for you is a tax-smart way to manage your healthcare expenses.

Questions?

As always, if you have questions about your retirement or any other financial matter, please reach out to your EBW financial adviser or Idelis Favole at ifavole@ebwllc.com.

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