Generally medical expenses are deductible. In 2012, medical expenses are subject to 7.5% of adjusted gross income (AGI). What that means is that if you make $50,000.00, you would have to have medical expenses in excess of $3,750.00. For 2013, medical expenses are subject to 10% of AGI. Using the same scenario, you would have to have medical expenses in excess of $5,000.00 for them to be deductible. When you think about it, that is a pretty high dollar amount. Because of this, most people don’t even try to deduct their medical expenses. For some people there is a way around this crazy limitation, the answer is Health Savings Accounts (HSA).
If you have a “high deductible” health insurance plan, you can contribute to an HSA. For calendar year 2012, §223(c)(2)(A) defines a high deductible plan as one with an annual deductible that is not less than $1,200.00 for self-only insurance, and $2,400.00 for family coverage. The annual out-of-pocket expenses (i.e. deductibles, co-payments, and other amounts that are not premiums) must not exceed $6,050.00 for self-only coverage or $12,100.00 for family coverage. Under §223(b)(2)(B) the annual contribution limit for 2012 is $3,100.00 if you have a single plan and $6,150.00 if you have a family plan. If you are age 55 or older, you can increase that contribution by $1,000.00.
For tax year 2013 a high deductible health plan is $1,200.00 for individual coverage and $2,400.00 for family coverage. This is up $50.00 and $100.00 from 2012 respectively. The maximum annual contribution for 2013 for individuals is $3,250.00 (up $150.00 from 2012) and $6,450.00 for family coverage (up $200.00 from 2013). The maximum out of pocket expenses for 2013 is $6,250.00 for individual coverage and $12,500.00 for family coverage. If you are age 55 or older, you can increase that contribution by $1,000.00.
Contributions to an HSA are 100% tax deductible. This deduction is taken “above the line,” meaning you do not have to itemize your deductions to receive a benefit. For example if you were a family and you made the maximum contribution to your HSA of $6,450.00, you would receive $6,450.00 as a deduction, instead of having that amount be subject to the 10% of AGI rule. Unlike Flexible Spending Accounts (FSA) you don’t have to use the amount that you put in the account before the end of the year. The amounts can rollover year after year. Provided that you pay for health care expenses a distribution from an HSA is tax free.
In order to be deductible for the current tax year HSA’s need to be funded by April 15th.
As I previously stated, when you withdraw money from an HSA the distribution is not subject to income tax provided you use them for qualified medical expenses. If you use the money in you HSA plan, for anything other than medical expenses, then the amount that you withdraw will be subject to income tax as well as a 10% penalty.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, and The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle