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The HSA … proof that the IRS really does give things away

Health Savings Accounts (HSAs) have little to no down side.  HSAs allow anyone with an eligible high deductible health care plan to get a tax break.  Generally speaking, medical expenses are only tax-deductible if you both itemize your deductions and your eligible medical expenses exceed 10% of your adjusted gross income.  HSA accounts offer a full and current deduction of your future qualifying medical expenses regardless of your income as long as you have a qualifying high deductible health care plan.

To be eligible for an HSA, you must be under 65 years of age and have a high deductible health insurance plan that meets both certain minimum deductible and maximum out-of-pocket requirements.  You must also open your HSA account prior to incurring a qualifying medical expense for your HSA to cover that expense, so open the account as soon as possible.  After opening the account, you can either fund your HSA as you need it (subject to the annual contribution limits) or you can fund it in advance and accumulate it future use.

While your HSA account cannot pay for your high deductible insurance premium, it can pay for your insurance deductibles, co-pays, prescriptions and dental bills as well as both Medicare supplement and long-term care insurance premiums.  Over-the-counter drugs without a prescription are generally not qualifying expenses and non-qualifying use of the HSA funds are both income taxable and possibly subject to a 20% penalty.  The penalty can be waived in cases of death, disability and for individuals over the age of 64.

Annual contribution limits are set for both single and family plans ($3,350 and $6,650 for 2015), and there is a annual catch-up contribution for individuals who are 55 and over ($1,000).  You can no longer contribute to your HSA past the age of 64 but you can use your HSA savings on your qualifying medical expenses during retirement without any required minimum distributions.

Why is this a good deal?  Whether or not you itemize, you can permanently reduce your current taxable income, dollar for dollar, by your current HSA contribution without even incurring a medical expense.  Thanks, IRS!