Don't Mess With Taxes

Mom is the best nurse, but sometimes you need outside medical care. In those cases, some inflation adjusted medical tax breaks could be just the Rx.

Autumn’s seasonal change also can bring some medical challenges.

Different flora means new pollens to aggravate allergies. Youngsters are back in classrooms, but all that reuniting with friends means sharing germs, too. And, of course, it’s cold and flu (and still COVID-19) season; get your vaccines!

Just one unexpected medical emergency can really ding a budget. But the tax code offers some ways that can help your financial hurt, if not your specific ailment.

Several of the many medical tax breaks also are adjusted each year to account for inflation.

Here, in Part 5 post of the ol' blog's annual tax inflation series, is a look at those health care related changes for the 2024 tax year.

Flexible spending account (FSA) bumps: A medical flexible spending account, or FSA, is a great and tax-saving way to pay for health costs that aren't covered by your insurance. How much you put into this workplace benefit also is indexed for inflation.

The base FSA amount for a health-related account was set at $2,500 when the Affordable Care Act, aka the ACA and/or Obamacare, became law back in 2010. The ACA also allows for the possibility that the FSA limit could increase depending on inflation.

For the 2025 tax year, you can put up to $3,300 in your FSA. That's a $100 increase from 2024's $3,200 FSA contribution limit.

Inflation also helps out if your company plan provides some relief from the usual FSA use-it-or-lose-it rule. Some employers allow their workers to roll over unused FSA money into the next benefits year. The IRS says that in 2025, the allowable rollover amount of $660. That's a $20 inflation bump from this year's $640 FSA rollover limit.

Health Savings Account (HSA) increases: Sometimes the cost of health insurance makes you feel worse than things that drive you to the doctor. That's why some folks opt for a high-deductible health plan, or HDHP.

The premiums for an HDHP tend to be lower. The downside, though, is the high deductible phrase in these plans' names. You have to pay more to reach your HDHP's deductible amount before the insurance coverage kicks in.

The tax code offers some help in dealing with an HDHP's high out-of-pocket costs. You can open an associated     , to pay for your larger deductibles.

The tax benefits of an HSA include:

• Fully deductible contributions up to the legal limit;
• Untaxed withdrawals when used to pay qualified medical expenses, including dental and vision exams;
• Tax-free interest on the earnings as long as the money is used to pay qualified medical expenses; and
• No requirement that HSA money be used or forfeited by a certain deadline.

The IRS actually announced back in May the 2025 inflation adjustments for HSAs and the HDHPs required to open these medical accounts. It reiterates them in this latest inflation announcement.

To save you some time (although if you want to click on over to that earlier post using the link in the previous sentence, that's great, too) the table below shows the HSA contribution and maximum out-of-pocket limits for high-deductible medical coverage for the 2025 and, for comparison, the 2024 tax years.

A note about the catch-up provision for older owners of an HSA. It’s the same for both 2024 and 2025 because it is set by law at $1,000 and not subject to annual inflation adjustments.

Medical Savings Account (MSA): Another tax-favored medical savings account is the aptly named Medical Savings Account, or MSA. This account also is known as an Archer MSA, with the name recognizing the former Texas Republican Rep. Bill Archer's support of the plan. Whatever you call it, these accounts also are potentially affected by annual inflation changes.

The Archer MSA was created to help self-employed individuals and employees of certain small companies meet medical care costs. But since 2007, they have essentially been replaced by HSAs. The IRS continues to account for them in inflation calculations to accommodate the Archer MSAs created before the law change. You can find details on the different accounts IRS Publication 969.

For tax year 2025, the IRS says that participants who have self-only coverage in an MSA, the plan must have an annual deductible that is not less than $2,850 (an increase from the $2,800 for 2024 tax year), but not more than $4,300 (that's also a bump from the $4,150 for the 2024 tax year). The maximum out-of-pocket expenses (other than for policy premiums) for self-only coverage in 2025 will be $5,700 (another increase, this time up from 2024's $5,550 cap).

For MSA participants with family coverage in 2025, the floor for the annual deductible is $5,700 (up from 2024's $5,550). However, the deductible next year cannot be more than $8,550 (a jump from the $8,350 for this year).

And if you have family coverage, the out-of-pocket expense limit (again, this doesn't cover premiums) is $10,500 in 2025, an increase from the tax year 2025 limit of $10,200.

Long-term care coverage premiums: In addition to medical insurance, many folks buy long-term care insurance to help them pay for the assistance they might need, in their own homes or in an eldercare facility, when they are older.

Premiums for a long-term care policy are deductible up to a certain amount as an itemized medical expense. The long-term care coverage amounts that can be claimed on Schedule A as part of you total medical expenses that exceed more than 7.5 percent of your adjusted gross income (AGI), are adjusted for inflation.

The maximum deduction is based on your age at the end of the taxable year. The table below shows the maximum deductible long-term policy payment amounts for the 2025 and 2024 tax years.

   
More doses of tax inflation tips: How are you feeling now, after all these health care tax numbers? I know it's a lot, but I hope this post took you less time to read than that five-year-old magazine you thumbed through during the interminable wait the last time you went to your doctor's office.

I also hope this information makes you feel a bit better about your taxes and how you can use these medical inflation-adjusted tax breaks to reduce them.

And more in the inflation adjustment series is on the way to inoculate your taxes against rising costs. As the box below notes, you can find a directory in the series' first post, with links to already published inflation adjustments, as well as preview of what's still to come.

Thanks for reading. And thanks especially for your tax inflation interest and explanation patience!

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