Health Savings Accounts (HSAs) allow you a tax-advantaged way to fund your health care costs. And the 2010 health care act may make HSAs even more attractive. Why? Because the act sets a higher threshold for deducting medical expenses.
What’s the new floor?
The tax code allows you to deduct qualified medical expenses — such as for medical and dental services and prescription drugs — but only to the extent those expenses exceed the applicable threshold or “floor.” Before 2013, that floor was 7.5% of adjusted gross income (AGI). Effective in 2013, the health care act has raised the floor to 10% of AGI.
That means it will be harder to exceed the floor. And, even if you do exceed it, your tax savings will be less than what it would have been with the 7.5% floor. For example, suppose your AGI is $100,000. In 2012, you’d have been able to deduct medical expenses in excess of $7,500. But in 2013, you can deduct only medical expenses in excess of $10,000. Say your medical expenses for the year are $12,000. In 2012, your deduction would have been $4,500. In 2013, your deduction will be only $2,000.
If you’re age 65 or older, however, you can continue to enjoy the 7.5% floor through 2016. Regardless of your age, be aware that the threshold for alternative minimum tax purposes was 10% before 2013 and continues to be 10%.
How can an HSA help?
An HSA allows you to save taxes on medical expenses without meeting any threshold and regardless of your income level. It allows you to make pretax or tax-deductible contributions up to an annual limit. (See the chart “2013 HSA and HDHP limits.”) The account can bear interest or be invested, and you can then withdraw money tax-free to pay for qualified medical expenses. You can even carry over a balance from year to year.
There’s a catch, however: You can contribute only if you’re covered by a qualified high deductible health plan (HDHP). Additionally, you are not eligible to contribute to an HSA once you become Medicare eligible. See the chart for the HDHP criteria.
Is an HSA right for you?
As you consider an HSA, keep in mind that, although HDHP deductibles are relatively high, premiums typically are lower than for lower-deductible policies. Depending on your income and your health, the combination of an HDHP and an HSA can be advantageous, especially with today’s higher 10% medical expense deduction floor.
| Individual | Family | |
| HSA annual contribution limit | $3,250 | $6,450 |
| HSA catch-up* contribution limit | $1,000 | $1,000 |
| Minimum HDHP deductible | $1,250 | $2,500 |
| Maximum HDHP out-of-pocket costs | $6,250 | $12,500 |
*Taxpayers age 55 and older may qualify to make these additional contributions.
For more information on this topic, please contact Jane Pfeifer at [email protected]
