Written by Patrick Murtha on January 10, 2023 in Uncategorized

Can a Health Savings Account Help Me Reduce My Tax Liability?

Everyone always wants ways to lower their tax liability. It keeps more money in your pocket, making it easier to reach your financial goals.

But you might feel like you’ve minimized your taxes as much as possible with a 401K or IRA, charitable contributions, and itemized deductions, but there’s one more way – a Health Savings Account.

What is a Health Savings Account?

An HSA uses pre-tax dollars for qualified health expenses. Common expenses you can use HSA funds on include:

  • Co-pays
  • Deductibles
  • Co-insurance
  • Prescriptions
  • Dental and vision care

To have a Health Savings Account, you must have a qualified High Deductible Health Plan (HDHP) or a plan that only covers preventative services without subjecting you to the deductible first. In 2023, the deductible minimums are $1,500 for individuals and $3,000 for a family to qualify for a Health Savings Account.

Individuals can contribute up to $3,850 to their Health Savings Account, and for families, up to $7,750 in 2023. People over 55 can contribution an additional $1,000 each year.

How an HSA Works

When you contribute to a Health Savings Account, you do so with pre-tax funds, just like you would for a 401K or IRA. In other words, you don’t pay taxes on the money you contribute to your HSA.

The money remains in your account until you need it for qualified medical expenses. HSA funds roll over each year, so you don’t have to use all the contributed funds if you don’t have qualified medical expenses. You may also leave the funds to a beneficiary.

In 2023, that maximum distribution you could withdraw from your HSA was $7,500 for individuals and $15,000 for family plans.

How HSAs Lower your Tax Liability

So how do HSAs lower your tax liability?

The US works on a tax rate system that assigns taxpayers a bracket based on their income. Therefore, your pre-tax contributions to accounts like a 401K and Health Savings Account reduce your taxable income and tax liability.

You also don’t pay taxes when you withdraw the funds as long as it’s for qualified medical expenses. This means you don’t pay any taxes on the funds, which reduces the cost of your medical expenses too.

However, if you use your Health Savings Account funds for unqualified medical expenses, you’ll owe taxes on the income and a penalty if you’re under 65 years old. Always check with your HSA provider before withdrawing funds if you aren’t sure. 

Benefits of an HSA

Health Savings Accounts have many benefits, including:

  • Lowering your tax liability
  • Save money on medical expenses
  • Funds roll over each year
  • Your funds may earn interest or be invested
  • You can save the funds for medical expenses in retirement

Final Thoughts

A Health Savings Account helps keep medical expenses affordable.

The money in an HSA is tax-free, and as long as you follow the provider’s guidelines, you’ll never pay taxes on the funds. In addition, because the funds never expire, you can use them today or 20 years from now and still receive the same tax benefits. 

If you’d like to learn more about how a Health Savings Account can reduce your tax liability, contact us at Murtha & Murtha to learn more.  For more HSA content, check out the following blog over at Henson and Murtha CPAs: Eligible Expenses of a Health Savings Account You May Not be Aware of.

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