The Closest Thing to Free Money in the Tax Code: The Health Savings Account

What if I told you there’s a way to turn your medical expenses into tax deductions AND build a tax-free investment account at the same time? Welcome to the Health Savings Account (HSA) – arguably the most generous tax break in the entire Internal Revenue Code.

Meet Sarah

Sarah runs a successful graphic design business in Las Vegas, NV, earning about $75,000 annually. Like many self-employed individuals, she takes the standard deduction ($14,600 in 2024) because itemizing doesn’t make sense for her tax situation. Each year, she spends around $2,000 on medical expenses – doctor visits, prescriptions, and dental care. Currently, she gets zero tax benefit from these expenses because they don’t exceed 7.5% of her income ($5,625 in her case) and she doesn’t itemize.

Enter the Health Savings Account (HSA)

HSAs offer the only triple tax benefit in the entire tax code:

1. Contributions are tax-deductible (Sarah could save $440 in federal taxes on her $2,000 medical expenses at her 22% tax bracket)
2. Growth of unused contributions are tax-free (similar to how an IRA works)
3. Withdrawals for qualified medical expenses are tax-free (try finding that anywhere else!)

For Benefits Like This, There Must Be A Catch

To access this tax windfall, Sarah needs a High Deductible Health Plan (HDHP). For 2024, that means:

• Minimum deductible: $1,600 for self-only coverage
• Maximum out-of-pocket: $8,050 for self-only coverage
  
  

(Those amounts are double if she has family coverage)

Sarah will also need a third-party administrator which sounds fancy (and expensive) but there are several companies that provide these services and most of them are free. You can find information about one we work with by going HERE.

So How Does Sarah Get Her Tax Deduction?

First, Sarah needs to verify that she has qualifying health insurance. Most health insurance providers will indicate which of their plans are HSA compliant.

Second, she needs to sign up with a third-party administrator, like Lively.

Third, Sarah makes a contribution to her plan which now qualifies as a deduction on her tax return (reported on form 8889).

Sarah’s tax deduction is now secure but what does she do when she has a medical expense? She can send a copy of any medical receipts to the third-party administrator and be reimbursed tax free!  Or better yet, many providers can issue you a debit card allowing you to pay for medical expenses directly!

Sarah Can Do Better than $440

With HSAs, Sarah gets a deduction when she makes the contribution. Not when she has the medical expense. Unlike other plans that force you to use it or lose it, unused contributions in an HSA can be invested and grow tax free. 

For 2024, Sarah could contribute up to $4,150 for self-only coverage. At her 22% tax bracket, that’s $913 in federal tax savings. That’s right – the government is essentially giving her $913 just for planning her medical expenses!

The Investment Jackpot

Here’s where it gets exciting. If Sarah contributes $4,150 annually but only uses $2,000 for current medical expenses, she could invest the remaining $2,150. Assuming a 7% annual return over 20 years, that extra $2,150 annual investment could grow to over $89,000 – all tax-free! It’s like having an IRA with no required minimum distributions and tax-free withdrawals for medical expenses.

Can It Get Any Better?

What can you do if you had qualifying health insurance during the year but are short on funds to make the contribution this year? The IRS gives you until April 15th next year to make this year’s contribution.

The Bottom Line

In a tax code filled with restrictions and limitations, the HSA stands out as the closest thing to “free money” you’ll ever find. It’s like the government is paying you to save for your healthcare needs!

If you’re ready to transform your medical expenses into tax savings and investment growth like Sarah, let’s talk. We can help you:

• Find the right HDHP
• Calculate your maximum tax savings
• Create your investment strategy
• Integrate this with your overall tax planning
  
  

Contact us before this year’s opportunity slips away.

Remember: Not taking advantage of an HSA when you qualify is like leaving free money on the table. Let’s make sure that doesn’t happen to you.