With the year-end quickly approaching, many U.S. taxpayers are beginning to explore the most optimal tax breaks and deductions to reduce their overall tax liability. One favorable tax deduction U.S. taxpayers should consider is a Health Savings Account (HSA), as they allow individuals to set money aside on a pre-tax basis to pay for qualified medical expenses.

Employers often offer High Deductible Health Plans (HDHP) as a healthcare option, so individuals should check with their employer if unsure. If an employer does offer an HSA, they may opt to fund it as well. If an employer does not offer an HSA, individuals can set up their own plan through some banks or other financial institutions, where they can then make their own contributions. In either event, individuals may only contribute to an HSA if they participate in a HDHP.

Tax Benefits

Although HSA contributions are pre-tax, there are specific contribution limits. For 2020, individuals with an HDHP can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into an HSA. Additional HSA benefits include:

  • Penalty-Free IRA Transfer: Individuals have the option to move money from their Individual Retirement Account (IRA) to their HSA with a once-in-a-lifetime, penalty-free transfer. To qualify, individuals must stay in their HDHP for at least a year. Otherwise, the money is treated as taxable income and will be subject to a 10% early withdrawal penalty. The maximum amount individuals can rollover from their IRAs is the same as the annual HSA contribution limit.
  • Expanded Qualified Expenses: The Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded qualified medical expenses for HSAs to include telehealth costs (over-the-phone consultations or virtual appointments) and over-the-counter drugs (even without a prescription) purchased after Jan. 1, 2020. Historically, HSAs could not be used to pay for insurance premiums, but the CARES Act allows individuals to use their funds to pay for COBRA coverage or their health care while collecting unemployment benefits.
    • Keep in mind, if you take distributions from your HSA for non-qualified expenses, the withdrawal will be subject to income tax and could result in an additional 20% tax.
  • Rollover Contributions: Unlike a Flexible Spending Account, individuals can roll over HSA contributions from year to year. HSA’s are also portable, meaning individuals will keep their funds even if they leave their company.

Whether covered by an individual’s employer or not, HSAs have proven to be a great tax benefit for U.S. taxpayers. Plus, the deduction isn’t limited to those who itemize. To explore additional tax benefits relevant to you or your business, contact Doeren Mayhew’s tax advisors today.