Don't Mess With Taxes

The inflation we're experiencing right now is truly a pain. Thank goodness most of my driving is my weekly trip to the grocery store, but those bills have almost doubled.

However, the current inflation level does have one, tiny bright spot for folks who have a specific type of health care coverage. It's bumping up tax benefits for individuals who have a high deductible health plan (HDHP) and associated health savings account (HSA).

HDHP coverage has grown in popularity as health care costs kept rising, even before this historic inflation increase. As the name indicates, these plan enrollees face more out-of-pocket costs for medical treatments. Many individuals, especially those in generally good health, accept that payment risk in exchange for policy premiums that are much lower than traditional types of health insurance.

Part of the HDHP possible expenses trade-off also is based on the opportunity to set up a companion HSA, an account to cover the higher deductibles. Even better, there are tax benefits connected to HSAs.

The deductible amount that qualifies for HDHP treatment, as well as how much you can put into an HSA, are adjusted annually for inflation. The Internal Revenue Service today issued Revenue Procedure 22-24 with those amounts for the 2023 tax year.

2023 high deductible limits: When you search for a HDHP, you want to make sure it meets the IRS guidelines. For 2023, the amounts for an HDHP will increase a bit.

Next year, a medical insurance policy qualifies as a high-deductible plan if it has a minimum annual deductible of $1,500 for individual coverage (up from $1,400 for 2022) or $3,000 for family coverage (up from this year's $2,800 amount).

The limits for annual out-of-pocket expenses also are increased for 2023. These expenses cannot next year exceed $7,500 for self-only coverage or $15,000 for family coverage.

The following table shows the HDHP amounts for 2022 and 2023 tax years.

Essentially, a plan's deductible amount must be at least the amounts shown in the table. As for out-of-pocket expenses, allowable amounts include deductibles, co-payments and other amounts, but not the premiums you pay for the plan itself.

HSA adjustments, too: Similar inflation changes also are ahead for your HSA that helps you cover your associated policy's high deductible.

For 2023, you can contribute up to $3,850 to your HSA if you have individual HDHP coverage. That's a $200 bump from the 2022's $3,650 HSA maximum.

Family HDHP coverage will let you in 2023 put up to $7,750 in your HSA. That's $450 more than the $7,300 allowed for these family plan HSAs this year.

Policy holders who are 55 or older by Dec. 31 can sock away an additional $1,000 for the tax year. Note that like other tax code catch-up provisions, the HSA additional contribution for older account owners is a flat one grand. It is 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.

One more medical acronym and amount: The IRS announcement also notes an increase in 2023 for an excepted benefit HRA, the acronym for a health reimbursement arrangement.

This is a medical plan that first appeared in January 2020 and which lets employees use pre-tax dollars for vision, dental, prescription and other types of benefits separate from their main health insurance plan.

The maximum excepted-benefit HRA amount for 2023 is $1,950. That $150 more than the $1,800 allowed this year.

Triple tax benefits for an HSA: Most of us tend to think short term when it comes to financial decisions. That's understandable, especially at times like these where money is tight.

If you lost income during the height of the COVID-19 pandemic and still are trying to recoup that money, you might be tempted to get and HDHP and then pocket those premium savings. You might want to think again.

If you put some of those savings into an HSA, not only will it help pay for medical costs that always seem to pop up at the worst time, it offers a variety of tax savings. In fact, there are three that pay off immediately.

First, the money you put into the medical account is tax free. Also, any employer contributions aren't included in your taxable income. Your contributions usually are accounted for through salary deferral at your workplace, meaning the HSA 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, and no itemizing is needed to make this claim.

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 includes using HSA money for not just the usual, and many, IRS-approved medical costs we all tend to run up each year, but also to pay for treatments of chronic medical conditions.

One warning here. Be careful when taking HSA distributions. Make sure to use the funds for allowable medical costs. If you're younger than 65 and spend HSA money on something that's not IRS approved, you'll owe a 20 percent penalty on that withdrawal.

Added HSA advantages: OK, the immediate tax savings are good, but so is the extra cash to meet other day-to-day expenses. But before you forgo an HSA, also consider these additional HSA financial and tax benefits.

An HSA's year-end balance can be carried over from year to year. There's no use-it-or-lose-it threat as with a workplace flexible spending account, or FSA.

Your HSA is portable. It's not tied to your job, so if you change employers, you take your HSA with you when you go to your new workplace.

Finally, if you have money in your HSA after you turn 65, you can use the funds without tax penalty for any reason. This 65+ withdrawal option means many folks essentially treat a well-funded HSA as another, de facto retirement account. And it's a nest egg without any government required minimum distributions (RMDs) to worry about when you celebrate your 72nd birthday.

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 your (and covered family) health care and financial factors, so that you can find a policy that fits both your medical and fiscal needs.

In doing so, you might find an HDHP and HSA is the best health care coverage Rx.

You also might find these items of interest:

• 3 medical tax breaks prompted by COVID-19
• Make the most of tax-deductible medical miles
• 10 ways FSA/HSA funds can help you cope with COVID-19
• No more unexpected medical bills, permanent 7.5% itemized healthcare costs threshold

Advertisements