Don't Mess With Taxes

Things have changed dramatically over the years when it comes to medical treatment and ways to pay for it, including various health insurance options. (Photo by Billy Black via Flickr CC)

Costs are a major consideration in deciding on a health care plan.

Many folks deal with the expenses by choosing a high deductible health plan, or HDHP, and opening an associated health savings account, or HSA.

As the HDHP name indicates, you're responsible for paying a deductible that's larger than many traditional medical insurance policies before the coverage takes effect. In exchange, a HDHP has much lower monthly premiums.

These plans tend to be the choice of folks who are generally healthy and don't expect to need a lot of medical care. They do want, though, to have insurance just in case something terrible and unforeseen, say an auto accident or chronic illness, happens.

As for those higher deductibles, Uncle Sam offers some help via an HSA.

HSA's many tax benefits: An HSA is a special tax-favored savings account. In fact, it offers triple tax benefits.

First, the money you put into the medical account is tax free. This is usually done through salary deferral at your workplace. The amount is taken out of your paycheck before taxes are calculated. If you make HSA contributions directly, the amount you contribute are tax-deductible.

Second, the earnings on the money you contribute to your HSA grows tax free. 

Third, when you use the HSA money to pay allowable out-of-pocket medical expenses, those withdrawals also are tax-free. 

You can open an HSA and get those tax breaks, but only if you choose a HDHP.

And since there are tax benefits, there also are some dollar limits that must be met, for both high deductible plans and their helpful savings accounts.

The Internal Revenue Service adjusts these amounts annually. This week, the agency released the 2020 tax year revisions (in Rev. Proc. 2019-25) for HDHPs and HSAs.

High deductible plan limits: In order to qualify as a high deductible health plan, the coverage must meet the annual limits set by the IRS.

Below are 2020's HDHP numbers, along with 2019's figures for comparison purposes.

Essentially, a plan's deductible amount must be at least the amounts shown in the table.

As for out-of-pocket expenses, the amounts include deductibles, co-payments and other amounts, but not the premiums you pay for the plan itself.

Savings adjustments, too: The accounts that help cover the out-of-pocket expenses you'll pay with a high deductible plan also are tweaked each year if inflation so demands.

The IRS says that for the 2020 tax year, the annual HSA deduction limit for a person with self-only HDHP coverage is $3,550. That's $50 more than the 2019 cap.

The annual limitation on deductions for an individual with family coverage under an HDHP goes to $7,100 next year. Again, that's a bump up from 2019's cap of $7,000.

The $1,000 add-on for 55 or older plan owners remains. This catch-up amount isn't subject to annual inflation adjustments.

Know and use the numbers: If you find an HDHP and HSA work for you and/or your family, these 2020 amounts can help you maximize this medical coverage.

"We'd encourage users to max out their contributions throughout the year to not only take advantage of the tax savings, but also to ensure that they are putting themselves in a position to better afford their future healthcare expenses. We also encourage employers to do their part by extending HSA contributions as a benefit to their employees," says Shobin Uralil, co-founder and chief operating officer of the HSA provider Lively, Inc.

Remember, though, that when deciding on any medical coverage, regardless of what federal tax law might be in place, you should shop carefully for the policy that fits your and your family's medical needs, as well as your bank account.

You also might find these items of interest:

• Comparing tax-favored HSA, HRA & FSA medical options
• Thumbing through the IRS' medical deduction (or not) list
• Maximizing the many medical expenses that are still tax deductible

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