Don't Mess With Taxes

Herbal supplements might make you feel better, but such products typically don't qualify as medical treatments that are eligible for tax-favored treatment. (Photo by Photo by Priscilla Du Preez 🇨🇦 on Unsplash)

Health savings accounts, or HSAs, can offer some taxpayers triple tax savings. Holders of HSAs also have a longer window to contribute to these tax-advantaged plans.

As noted in my March tax moves post, you can contribute to your HSA by Tax Day (that's April 15 this year), and have it count as money put into the account for the prior tax year.

In addition to being a good tax strategy, bulking up an HSA is a smart medical move if you have a lot of medical expenses to cover under a high deductible health plan. The tax-free HSA money can be used to cover your eligible medical costs.

Allowable medical costs: The key word here is eligible. Allowable medical costs generally are treatments prescribed by a physician as necessary to diagnose, ease, or prevent a physical or mental illness.

Payments for overall health and wellness products are not considered medical expenses under tax law. Rather, they are personal expenses, and therefore are not tax deductible.

That also means that you also cannot use HSA money to reimburse you for such basic health and wellness expenses. The same tax break prohibition also applies to health flexible spending arrangements (FSAs) health reimbursement arrangements (HRAs), and medical savings accounts (MSAs).

Medical deduction misrepresentations: The Internal Revenue Service this week put out word for folks with any of these medical cost coverage plans to be aware of reimbursement rules.

The reason for the reminder? The IRS recently has seen some companies misrepresenting products as eligible for HSA and similar plan payments.

"Legitimate medical expenses have an important place in the tax law that allows for reimbursements," said IRS Commissioner Danny Werfel in making the announcement.

"But taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don't qualify as medical expenses," added Werfel.

Wrong tax reasons: There are several different inaccurate tax claims by these companies.

One seen frequently is the mistaken contention that notes from doctors based merely on self-reported health information can convert non-medical food, wellness, and exercise expenses into tax deductible medical expenses. Not true, says the IRS.

Such a note would not establish that an otherwise personal expense satisfies the requirement that it be related to a targeted diagnosis-specific activity or treatment. Again, these types of personal expenses do not qualify as medical expenses, and are not tax deductible or eligible for medical plan reimbursements.

The IRS provides the following example of an unallowable HSA, FSA, HRA, or MSA expense claim.

A diabetic, in his attempts to control his blood sugar, decides to eat foods that are lower in carbohydrates. He sees an advertisement from a company stating that he can use pre-tax dollars from his FSA to purchase healthy food if he contacts that company.

He contacts the company, who tells him that for a fee, the company will provide him with a "doctor's note" that he can submit to his FSA to be reimbursed for the cost of food purchased in his attempt to eat healthier.

However, when he submits the expense with the note, the claim is denied because food is not a medical expense, and plan administrators are wary of claims that could invalidate their plans.

Added costs of improper medical claims: Sometimes the companies pushing their not-quite-medical products are just ill-informed. Other times, the promotions are scams to increase sales.

Either way, the taxpayer who falls for the medical tax misinformation could end up with tax complications.

Health spending plans that pay for, or reimburse, non-medical expenses are not qualified plans, notes the IRS.

And if a plan is not qualified, all payments made to taxpayers under the plan, even reimbursements for actual medical expenses, are counted as taxable income to the illegal plan owner.

So be careful about what expenses you submit to your tax-favored medical savings plan for payment or reimbursement.

You can read more about allowable medical costs in my prior posts —

• IVF costs are tax deductible medical expenses
• 11 medical costs that could make itemizing the best tax Rx
• Do you have more time to use FSA money? Here are 6 spending suggestions
• IRS announces high-deductible health plan, HSA & HRA inflation bumps for 2024
• Pleasant medical tax surprises: No more unexpected medical bills, permanent 7.5% itemized healthcare costs threshold

You also can go to IRS.gov and check out the special Can I deduct my medical and dental expenses? page, as well as IRS Publication 502, Medical and Dental Expenses.

Tax Felon Friday: If any of the wellness promotions that have caught the IRS' recent attention turn out to be tax-related health scams and the perpetrators are caught by the agency and its Criminal Investigation unit, the investigation and prosecution likely will find a place in the ol' blog's Tax Felon Friday hall of shame.

If you want to catch up on all sorts of tax miscreants that already made it into this category, the Tax Felon Friday page is a good place to start.

And if you want more tax crime posts, notably those that were published long before I gave them a special end-of-week feature, you can peruse, what else, the tax crimes category. You'll find this post at the top of that collection right now, so just scroll down for more.

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