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Health Savings Accounts' medical and tax advantages

Saving for medical costs
Health Savings Accounts, or HSAs, have increased in popularity since they were created in 2004.

More than 20 million people now have these particular medical savings plans, according to a Kaiser Family Foundation (KFF) survey last fall. KFF's analysis also found that the average account balance grew by more than a third last year to more than $1,800.

Growth of HSAs could speed up under a Republican replacement for the Affordable Care Act. Various GOP alternatives for Obamacare call for expansion of HSAs.

High deductibles required: HSAs not only offer a way for account owners to pay medical bills, they do so in a tax-friendly way.

But before you can open an HSA, you must have a high-deductible health insurance plan, or HDHP.

As the medical coverage's name — and the table below for the 2016 and 2017 tax years — indicate, you have to pay more of your health care costs because of the large deductible.

______________________________

High Deductible Health Plan Limits
Source: IRS HDHP inflation adjustments

 

2016

2017

Minimum health plan deductible, single coverage

$1,300

$1,300

Minimum health plan deductible, family coverage

$2,600

$2,600

Maximum out-of-pocket expenditures, single coverage

$6,550

$6,550

Maximum out-of-pocket expenditures, family coverage

$13,100

$13,100

______________________________

 

HSA covers out-of-pocket costs: While HDHPs can be costly if you have a lot of medical costs, they usually have lower monthly premiums than do medical policies with lower deductibles.

This is where an HSA comes into the picture. The money you put into an HSA helps pay for your HDHP increased out-of-pocket medical costs.

As the KFF data shows, more companies are offering their workers HDHPs and the associated HSA option. However, if you buy your HDHP on your own, you set up your HSA yourself, usually at a bank or other financial institution although some investment options are available.

When your money goes into an HSA via a workplace plan, it's taken out of your paycheck before taxes are calculated. If you make your HSA contributions yourself, those amounts are tax-deductible. Either way, HSA earnings are tax-free, as are withdrawals for eligible medical expenses

Limits on contributions: There are, however, Internal Revenue Service limits on how much you can contribute to an HSA.

The contribution caps are adjusted annually, if warranted, for inflation. The type of high deductible insurance policy you have also is a factor.

For 2016, the individual coverage HSA contribution limit is $3,350 and the family coverage limit is $6,750. For 2017, the amount for singles goes up slightly to $3,400 while the family coverage limit remains at $6,750. If you are age 55 or older, you can contribute an additional $1,000 to your HSA.

You have until the tax filing deadline to contribute to your HSA for the prior tax year. This April, that deadline is Tuesday the 18th.

GOP changes? House Speaker Paul Ryan's (R-Wisconsin) proposal would increase HSA contribution limits and allow more tax-free contributions.

An alternative offered by Sen. Rand Paul (R-Kentucky) would eliminate the upper limit on contributions and allow the accounts to be coupled with any type of insurance, not just high-deductible plans.

Regardless of what happens with Obamacare and any possible GOP replacement plan, a high deductible health plan and HSA might be worth exploring.

Today's Daily Tax Tip looks at the differences between HSAs and FSAs, another tax-favored medical acronym account (it stands for flexible spending account).

Check them both out and be sure to take advantage of whichever account works for your health care costs and tax situation.

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