Health Savings Accounts (HSAs) are tax-sheltered accounts that, when combined with a high-deductible health insurance plan, allow a tax deduction for contributions made to the HSA.
Essentially, the contribution to an HSA is deductible annually up to $3,250 if you’re single and $6,450 if you’re married. An additional $1,000 can be contributed if you are 55 or older.
These deductions help to reduce your current income taxes. Funds withdrawn from the HSA to pay medical bills are not treated as taxable income to you. It’s the best of all possible worlds: you receive a deduction for the contribution to the HSA and don’t have to recognize income when qualified medical payments are made by the HSA.
In order to qualify for an HSA, you must participate in a high-deductible health insurance policy. This simply means that the deductible on your health policy can’t be less than $1,250 for self-only coverage or $2,500 for family coverage.
These are minimum deductible limits, and you’re free to participate in a health plan with higher limits and still qualify for an HSA. However, the maximum out-of-pocket expenses (including deductibles and co-payments, but not insurance premiums) can’t be more than $6,250 for self-only coverage or $12,500 for family coverage.
All of the limits noted are for 2013; these limits are adjusted annually for inflation.
David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.