I recently started an hsa (Health Savings Account) and was unsure as to whether I would be able to deduct my hsa yearly contribution from my income tax return due to the fact that I do not have earned income (a requirment for a Roth contribution). The Fairmark forum allows one to post tax questions and provides other contributors the opportunity to respond. Very helpful resource. Not your tax advisor, but the next best thing and its free!
The best news: "An hsa contributions can be deducted from
any income, not just earned income". In effect, this hsa contribution refunds an additional $480 off my tax bill (on a $3250 hsa contribution/deduction for 2013).
This site has been mentioned by MFO posters in the past and I just thought share my story and remind others of its value.
Thanks for bringing it to my attention MFO.
fairmark.com/Also, here is Pub 969 on hsa and other tax favored health plans:
irs.gov/pub/irs-pdf/p969.pdf
Comments
If you don't get a good answer in one of those places, you probably won't find one anywhere.
If your HSA started last year, you can contribute the full amount for last year, so long as you keep your eligibility (via HDHP) through all months in 2014.
The HSA deduction is great, because it's a top line deduction. It reduces MAGI for SS, for Medicare, for deductibility of traditional IRA contributions, for eligibility to contribute to Roths. If you're retired, you can use it to offset Roth conversions. And the HSA money can be used to pay for Medicare (though not Medigap or most other health insurance).
Regarding HSA, the tax advantage is great especially if you can build up a decent balance in your healthy years, keep that unused in a no-fee account with decent investment choices to grow it, and use it as a medical emergency fund for the future rather than draw it down when you are able to pay from your tax dollars.
There is just one caveat, make sure your health care choice to get HSA benefit is the right one for you. Otherwise, you may land up paying more for your health care than any potential tax benefits. HSA with HDHP is a partial self insurance for health and as such your savings on using the HSA with HDHP is probabilistic not guaranteed.
One particular gotcha is pharmacy benefits that determines HSA eligibility when not complicated by availability of other supplemental insurance, medicare and such. This is often ignored in calculations.
Even for relatively healthy people, incidences that aren't necessarily serious may still incur significant pharmacy charges. Unfortunately, plans that have a copay for pharmacy charges rather than a deductible aren't eligible for HSA even if you have a high deductible for medical. Having to pay just for that pharmacy deductible even with HSA dollars may negate must of the tax savings.
There are other less known problems with high deductible plans that make even the simple calculation of premium vs deductible difficult because everybody in the health industry is gaming the system.
I ran into a situation in the past where a clinic had multiple rates for the same thing in cohoots with the insurance company. They would charge a higher "negotiated" rate in the deductible period to the patient and have a different smaller "negotiated" rate when insurance companies had to pay. While you may think this will use up deductible faster, making the insurance company liable for charges after that, the insurance companies have gamed this to get people to pay the maximum within the deductible period so that people who don't go over the deductible subsidize the costs to the insurance company in plans where they have to pay. The HDHP plans in particular give them a lot of playing room for this kind of gaming. This is legal.
So, the savings in the difference in premium for taking a higher deductible may be less than what you counted on as self insurance if you have any expenses and may even cancel it out.
The US medical system is the biggest risk to one's financial health in more ways than one.
I only take zero deductible plans now with higher premiums so I don't have to deal with this crap even if I land up paying more with good health which is not a bad thing than the other way around! It is easier to spend that time earning more elsewhere than trying to maximize that last dollar in taxes with more accounts to manage.
You can't win the medical bills game, the house always wins.
From Bloomberg:
"“In the end, we all grow older and sick and we may find we’ve shot ourselves in the foot,” with this shift to high deductibles and savings accounts, Stoll said."
bloomberg.com/news/2011-09-07/health-savings-plans-let-firms-shift-more-costs-to-workers.html
So long as (a) you have medical qualified medical expenses that you incur after you start the HSA, and (b) you don't use those expenses for some other tax benefit (e.g. FSA, itemized medical deduction, etc.), you can use those old expenses to satisfy the requirement that money you pull out must go toward expenses. Doesn't matter if they're years old.
This effectively gives you a way to contribute more to a "Roth".
See Internal Revenue Bulletin 2004-33 Q&A #39. (I keep a bookmark on this; otherwise it seems too good to be true.)
While HSA/HDHPs are indeed a game of probabilities, sometimes that game is stacked. I looked at the insurance options I had readily available, and the HDHP came out cheaper for best case (no major expenses, but could include several trips to the doctor in a year), and for worst case (lowest out-of-pocket cap). Only in the middle (e.g. outpatient surgery surgery that didn't blow past the cap) would I come out worse.