“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin, 1789
But was this illustrious founding father the first to introduce this now commonly known concept? The Yale Book of Quotations shows that Christopher Bullock said in 1716, “Tis impossible to be sure of anything but Death and Taxes.” And only eight years later, Edward Ward stated that “Death and Taxes, they are certain.”
Regardless of the origin, the fact that this sentiment still rings true hundreds of years later proves the perpetuation of the inevitable: the majority of taxes are unavoidable, even when it comes to the financial burden associated with our health itself.
Fortunately, there are multiple options available for those seeking a tax-advantageous safety net of sorts — two of the most common are a Health Savings Account (HSA) or a Flexible Spending Account (FSA).
Breaking it down: What is the difference between FSA and HSA?
First, it’s important to note that both types of accounts serve to allocate pre-tax dollars to be set aside for specified purposes — including (but not limited to) medical, vision, and dental expenses you may incur throughout the term of your given plan.
- HSAs are accounts you set up yourself. You can set up an account at your bank or credit union, for example. With this account, you can keep it no matter where you go or where you work (or if you work at all). You — and possibly your employer — contribute to the account throughout the year. The only stipulation is you must have a High Deductible Health Plan (HDHP) to have an HSA. Further, funds in an HSA can be rolled over each year, making it a smart choice if you plan on long-term savings.
Once your HSA is set up, you can allocate additional money to the account with automatic deductions from your paycheck, and all funds contributed are tax deductible. An HSA is also a good consideration for those who wish to carry their plan and funds with them, even if they choose to pursue a career with a different employer.
- Your employer owns your health FSA, and both you and your employer can fund it. One of the key benefits of an FSA is that funds can be utilized for childcare expenses in addition to products and services related to your health. This type of plan is, however, a use-it or lose-it arrangement. There is a rollover provision, though. Up to $500 of your unused FSA funds can be rolled over to the next year. If you contribute more throughout the year than you’re able to spend, you may find yourself scrambling to make doctor’s appointments in December to use up what you’ve put into your FSA.
As is the case with an HSA, you can apply funds to your FSA from your gross pay, which means that what every dollar you put in is considered a tax-free contribution. In addition, you’re not likely to owe taxes on any withdrawals as long as you use the funds strictly for qualified expenses.
Note: Self-employed filers are able to open an HSA but not an FSA.
How do health accounts help save on your taxes?
When you make qualified contributions to an HSA or health FSA, you can take a deduction for the amount of your contribution (or your contributions can reduce your taxable income on Form W-2). Either way, your income tax bill goes down.
If your employer makes qualified contributions for you, the amount of their contributions is not taxable.
Note: Health account contributions do not reduce your income tax subject to Social Security and Medicare tax.
Why not take a tax deduction for medical expenses instead?
Instead of setting up a health account, you could pay for your medical expenses with after-tax dollars and take a deduction. However, there’s one major problem with that.
You can only deduct medical expenses to the extent they exceed 7.5 percent of your adjusted gross income (AGI).
There goes most or all of your deduction. If you qualify for a health account or other plan, it’s usually well worth the trouble to set it up and use it for any qualified medical expense needs that arise throughout the tax year.
Contributing to an FSA or HSA can be a game changer.
Even those with the most robust medical, vision, or dental insurance policies may still find themselves wondering what might happen if their health plan fails to cover an unexpected expense. Depending on your individual circumstances, an HSA or FSA may offer the peace of mind you seek for yourself and your family — as both a safety net in times of need and a welcome break for at least some of those unavoidable taxes.
Source : TaxAct Blog