Do you have questions about how Coronavirus Relief impacts your Health Savings Account? We have answers for you! With this year’s changes to tax deadlines due to the Coronavirus relief bill (CARES Act), you have time to consider how to lower your tax bill while saving for healthcare and retirement. Programs like Health Savings Accounts (HSAs) are designed to give individuals tax advantages to offset out-of-pocket health care costs.
Contributions may be made to your HSA for a particular year, at any time during the year or by the due date for filing your return for that year. However, with the due date for filing Federal income tax returns extended to July 15, 2020, under CARES Act, the HSA contribution deadline was also extended and now you can make a 2019 contribution to your HSA at any time up to July 15, 2020.
How Does an HSA Affect My Taxes?
There are many benefits to an HSA. It can receive contributions from any eligible individual on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s return.
Employer contributions aren’t included in gross income; distributions from an HSA that are used to pay qualified medical expenses are not taxed. Like an IRA contribution, this can be a way to lower your tax liability with HSA contributions or save with tax deferment like a 401(k).
Tax Benefits of an HSA
- You can claim a deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize.
- Contributions to your HSA made by your employer may be excluded from your gross income.
- The contributions remain in your account until you use them for future medical expenses as a roll-over.
- Contributions to HSAs generally aren’t subject to federal income tax, and earnings in the account grow tax-free.
- Distributions may be tax-free if you pay qualified medical expenses.
- An HSA is “portable”, meaning it stays with you even if you change employers or leave the workforce.
- Under the “last-month rule”, you are an eligible individual for the entire year if you are eligible on the first day of the last month of your tax year (December 1 for most taxpayers).
Qualifying for an HSA
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You are covered under a high deductible health plan (HDHP).
- The IRS has recently announced that HDHPs can pay for 2019 Novel Coronavirus (COVID-19)-related testing and treatment, without jeopardizing their status. This also means that an individual with an HDHP that covers these costs may continue to contribute to an HSA.
- You have no other health coverage except what is permitted under other health care coverage.
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on another person’s 2019 return.
- If another taxpayer is entitled to claim an exemption for you, you can’t claim a deduction for an HSA contribution.
How Much Can I Contribute?
- Contributions: Can come from you, your employer, or other eligible contributors.
- For 2019, the limit is $3,500 for individuals ($3,550 in 2020) and $7,000 for families ($7,100 in 2020), plus an additional $1,000 “catch-up” contribution for anyone age 55 or older by the end of the tax year.
- Pre-Tax Contributions: Contributions are typically made with pre-tax dollars, through payroll deductions at your employer. As a result, they are not included in your gross income and are not subject to federal income taxes. In most states, contributions are not subject to state income taxes.
- Tax-Deductible After-Tax Contributions: If you make contributions with after-tax dollars, you may be able to deduct them from your gross income on your tax return.
- Due to its tax-deferred investment nature combined with the ability to take tax-free distributions to cover medical expenses, an HSA can be a way to plan for, and reduce, your health-care expenses in retirement.
TurboTax is ready to help you stay informed and file now up until the extended federal deadline of July 15, 2020. TurboTax will ask simple questions about you and give you the tax deductions and credits you’re eligible for based on your entries. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent with an average 15 years experience to get your questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish and can review, sign, and file your taxes.