Your health savings account offers you significant benefits on your taxes. Not everyone understands, for example that they are allowed to deduct the contributions they make to their health savings account even if they do not itemize their tax deductions. The best way to understand how to manage your health savings account for tax purposes is to look at the information provided by the IRS.
A health savings account is specifically created to allow you to set aside money for health expenses. It is designed to work with high-deductible health insurance plans, which are extremely popular among employers as these plans require employees to pay for the initial burden of their health costs out of pocket before the insurance company begins paying for medical expenses. With a health savings account, you are able to set aside funds for basic medical expenses and prescriptions in advance of paying off your deductible.
According to the IRS, having a health savings account entitles you to numerous benefits. The interest you earn on your health savings account, for example, is tax free. Distributions from your account are also tax free if they meet certain qualified medical expenses. If your employer makes contributions to your health savings account, those contributions may be excluded from your gross taxable income. Lastly, you are allowed to include the contributions you or someone other than your employer makes to your health savings account as a tax deduction, even if you do not itemize your deductions.
The IRS allows these types of tax advantages to encourage Americans to save money in health savings accounts. When you set aside money in advance, a medical emergency does not become a financial emergency. Likewise, having money in your health savings account means you are more likely to be proactive about your health and engage in preventative care that helps prevent future health problems and their associated expenses.
If you have a health savings account and have never counted it as a tax deduction, it is time to change the way you do your taxes. Many types of tax software include questions about health savings accounts as part of the tax walkthrough process. Consider consulting a CPA to make sure you are doing your taxes correctly, including the part of your taxes related to your health savings account.
If you do not have a health savings account, talk to your HR director about including it as part of your employee benefits package. Health savings accounts are hugely beneficial to both employees and employers, which is another reason why the IRS offers so many incentives to ensure people take advantage of these unique accounts.
Maximize your health savings account for tax purposes by ensuring you are deducting it appropriately on your taxes. Remember that employer contributions generally do not count towards your gross income and that you do not pay taxes on interest earned. Health savings accounts are designed to benefit you, so make sure you are getting all the benefits to which you are entitled.
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