Don't Mess With Taxes

The delay this year of Tax Day until mid-July also means you have time to make the most of the 2019 health savings account (HSA) limits.

One of the distressing health-related side effects of COVID-19 is that many of the millions who have lost jobs due to the pandemic also lost their medical coverage. A new analysis says that here in Texas alone more than hat 1.6 million Texans could become uninsured following job losses.

Many who are able to replace employer-provided coverage will turn to a high deductible health plan (HDHP).

As the HDHP name indicates, these policies require the insured to pay more before the coverage starts picking up the bills. The trade-off is that the monthly premiums are much smaller than plans with lower deductible limits.

These policies work well for folks who don't have chronic medical issues, but want to make sure they have coverage in case of an unexpected health emergency. 

Even better, when you have a HDHP, you can set up a health savings account (HSA). This is an associated saving account that can be used to pay for most the out-of-pocket costs you have to meet under your policy's high deductible.

And last year, the Treasury Department made these savings plans more appealing to individuals who are dealing with continuing medical issues. Internal Revenue Service Notice 2019-45 gives HSA owners more flexibility in paying for such treatments as glucose or blood-pressure monitors and regular medications for such ailments as asthma, congestive heart failure and diabetes.

Every year, the IRS adjusts the amounts that define an HDHP and how much you can contribute to the associated HSA. It's that time.

2021 high deductible limits: For 2021, a medical insurance policy qualifies as a high-deductible plan if it has a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage.

Because inflation has been low, there's little change in the 2021 HDHP amounts from the 2020 levels. Below are the two tax year's figures, including the maximum out-of-pocket expenditures a policy holder could face.

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.

HSA adjustments, too: As for your coverage's HSA, this account that helps you meet the high deductible also is tweaked each year to reflect inflation.

For 2021, you can contribute up to $3,600 for if you have individual HDHP coverage. That's a slight increase from this year's $3,550 cap.

Family HDHP coverage will let you put up to $7,200 in your HSA. That, too, is up from this year's $7,100 family coverage limit.

Policy holders who are 55 or older by Dec. 31 can sock away an additional $1,000 for that year. Note that like IRA catch-up provisions, the HSA added contribution for older account owners is a flat grand, not adjusted annually for inflation.

But if you're married, have family HDHP coverage and your spouse also will be 55 by the end of the year, he or she can also take advantage of the added $1,000 catch-up amount for his or her own separate HSA.

Still time for 2019 HSA action: One good thing in this chaotic coronavirus year is that the IRS' annual HDHP and HSA inflation adjustment is an unexpected reminder to max out your 2019 amounts.

Tax law says you can make contributions to your HSA for the prior tax year up until the annual tax-filing deadline. That's usually April 15, meaning that by the time the IRS announces HDHP/HSA inflation changes each May, that option is long gone.

Now, however, one of the very few good coronavirus-prompted tax changes is the postponement of Tax Day 2020 until July 15. That means you still have plenty of time (if you have the money) to contribute to your HSA for the 2019 tax year.

Those 2019 HSA maximums are $1,350 for a single HDHP owner or $2,700 for family coverage.

Wasted, but improving, participation: If you find an HDHP and HSA work for you and/or your family, all these various tax year amounts can help you maximize this medical coverage.

A 2014 Employee Benefits Research Institute study found that around 40 percent of HSA-eligible HDHP users never even open the associated savings account. But as medical costs have increased, more people appear to be choosing HDHPs and opening HSAs.

Devenir Research's 2019 year-end research report on these medical savings plans found that were more than 29 million HSAs with almost $72 billion in assets.

Tax and other HSA benefits: When finances are tight, like they are now especially with so many out of jobs or facing reduced income, the appeal of a HDHP's lower premiums is an obvious medical choice.

But don't overlook the advantages of an HSA. This 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, you deduct the amount you contribute when you file your taxes.

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. This year, those eligible expenses (again due to COVID-19) have been expanded.

My maxing out HSA contributions throughout the year allow you to not only take advantage of the tax savings, but also ensure that you have enough in the account to pay future healthcare expenses.

Of course, any medical coverage decision is based on many things, not just the tax implications. But if tax savings are a component, do take them into account, along with all the health care and financial factors so that you can find a policy that fits both your medical and fiscal needs.

You also might find these items of interest:

• Make the most of tax-deductible medical miles
• Thumbing through the IRS' medical deduction (or not) list
• Expanded tax help in covering child care costs during coronavirus closure rules

Advertisements