HSAs offer a solid cushion when employees need to withdraw money to handle unplanned medical expenses or healthcare costs without any penalties. (Photo: Shutterstock)
If you asked someone what their favorite season is, you'd be hard pressed to find someone that responds with, "tax season!" It's the time of year that's dreaded by many but there are several steps you can take to turn your least favorite season into 'money-saving season.' Understanding your tax-advantaged accounts is the first step in realizing better tax breaks this year – especially because the deadline has been extended to July 15th – as well as help you prepare for 2021.
One such tax-advantaged account is a health savings account (HSAs). HSAs are available to any taxpayer in the U.S. enrolled in a high-deductible health plan and allow individuals to contribute and withdraw funds tax free, as long as they're used to pay for qualified medical expenses. In addition, the money is not lost at the end of the year; funds can be rolled over and allowed to grow if they are not spent.
HSAs offer significant tax breaks when utilized properly by individuals and employers. For example, the maximum contribution for a family in 2019 was $7,000. With a marginal tax rate of 30%, that family would save $2,100 on their taxes when they maximize their contributions. With savings like that, it's hard to overstate the importance of leveraging your HSA this tax season.
Here are a few tips on how to maximize your HSA tax breaks this year and best prepare for 2021:
|Maximize your contribution
HSA participants should ensure they've maximized their contribution prior to filing their taxes. As mentioned, families can contribute up to $7.1K, single individuals up to $3.1K and for those over 55-years-old up to $8.1K. By maximizing your contribution, you'll naturally maximize your tax breaks, and if you're in a position where you won't spend the full contribution within the year, the funds roll over and continue to grow tax free.
|Track health care expenses
If you're not in a position to contribute the maximum amount, make sure you're tracking your yearly health care expenses so that you can at least contribute that amount to the account. By doing so, you'll receive tax breaks on all of your qualified medical costs.
Furthermore, if you have a record of all health care expenses from the current and prior year that were not originally reimbursed through your HSA, you can pass those expenses through the HSA at the time of filing to get a current year tax benefit.
|Plan for the future
Once your taxes are complete for the prior year, there's no better time to start looking ahead to next year. Now is a great time to determine what things you might want to do to put yourself in a better position and reduce your tax obligation come 2021 tax season. For those financially able, consulting a tax expert is the best way to ensure you're making tax season work for you.
With coronavirus creating uncertainly for many employees anticipating their July 15 filing or the 2021 tax season ahead, they should know that HSAs offer greater protection in the face of crisis situations. HSAs offer a solid cushion when employees need to withdraw money to handle unplanned medical expenses or healthcare costs without any penalties. This saves them from additional tax penalties and preserves their future financial wellness.
While these are great steps towards enhancing the current tax season and next, individuals should really treat their HSA as a long-term vehicle that will help reduce the current tax obligation while growing your savings tax-free for future tax-free use on medical expenses. A couple retiring today can expect to have over $250,000 in out of pocket medical expenses and properly leveraging HSAs is a great way to be ready for this future expense while reducing your current tax obligation.
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