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Health savings accounts, or HSA's, are individual bank accounts owned by employees or self employed individuals that allow for tax free payment or reimbursement of eligible medical expenses. 

HSA Highlights/Advantages:

• Tax Deductible Contributions
  
• Tax Free Growth on Account
  
• Tax Free Distributions for Qualified Medical Expenses
  
• Can be used as a Traditional IRA after age 65 (or Medicare Eligibility)
  

HSA's In general:
These accounts work in a manner which is very similar to an IRA account but they are for out of pocket medical expenses.  Qualifying individuals can deposit funds to the account, take a tax deduction for the funds deposited, and then withdrawal the funds tax free to pay qualified medical expenses.  You might be thinking, "wouldn't it be easier just to deduct your medial expenses instead?"  Well, yes it would but that isn't they way congress has written the laws.  As things stand now you can only deduct medical expenses that exceed 10% of your income.  For most people that means that they can't deduct any medical expenses at all. Health Savings Accounts are a good way to convert these otherwise non deductible medical expenses into deductible ones.

The Rules:
No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

For tax year 2016 an individual with self-only coverage can contribute and deduct up to $3,350.  A contribution and deduction of up to $6,750 is allowed for a family coverage plan.

What's the catch?  Well, there are a couple of them.  First, to have a tax advantaged Health Savings Account you need to have a qualifying high deductible health insurance plan.  The plan must have a deductible of no less than $1,300 for self-only or $$2,600 for family coverage. Additionally, the plan must meet the maximum out of pocket rules.  The most that a plan participant can be required to pay our of pocket cannot exceed $6,550 for self coverage or $13,100 for family coverage.  Typically, qualifying high deductible plans have lower monthly premiums but higher out of pocket costs associated with them.  The Health Savings Component is mean to help you cover those higher out of pocket costs.  

To receive tax free distributions, the proceeds must be used for qualified medical expenses.  If HSA funds are used to pay for unqualified expenses the distribution will be included in income and will also be subject to a 20% penalty.  After you reach age 65 and become eligible for medicare you can take distributions from the account for non medical purposes without incurring the 20% penalty; however, the distributions will be subject to tax.  

Retirement Planning - How to Utilize Your HSA in Retirement:
Once you become medicare eligible you are no longer qualified to make contributions to your HSA. But, you can still utilize your Health Savings Account.  In fact, an HSA is a valuable asset in retirement providing useful benefits.  If you are fortunate enough to remain relatively healthy during your working years and don't incur a lot of medical expenses, you could build up a significant balance in your HSA.  You can continue to use this account balance for medical expenses as they occur. Your distributions will remain tax free to the extent that you are reimbursing medical expenses. What you don't use for medical expenses can be withdrawn just like regular IRA withdrawals with no penalty.  You will need to pay income tax on the non medical distributions, just as you would with a traditional IRA.

You may be qualified for these adjustments to income:

Educator expenses -  This deduction applies to K – 12th grade educators, and is limited to $250 of documented supplies per qualified taxpayer. Expenses exceeding $250 can be taken as a miscellaneous itemized deduction. 

A health savings account - Health savings accounts, or HSA's, are accounts set up exclusively for paying the qualified medical expenses of the account beneficiary or the beneficiary’s spouse and dependents.  Health savings accounts are designed to accompany specific insurance policies with high deductibles.  Be sure to discuss this with your return preparer to see if you qualify.

Moving expenses - If you moved more than 50 miles for employment purposes you may be entitled to deduct the cost of moving your-self and your household goods.  You may deduct qualified out-of-pocket expenses or an employer reimbursement that was included in your W-2 form. If you received a non-taxable reimbursement, you cannot deduct the expenses.

Self-employment tax - If you are a sole-proprietor, active partner or have miscellaneous income subject to self-employment tax, you can deduct half of the self-employment tax. 

Self-employed pension plans - You can deduct all qualified contributions to self-employed SEP, SIMPLE, or other qualified plan.  See related articles under "retirement plans" for limitations and details.

Self-employed health insurance deduction -  Sole proprietor's, active partners with net business income, and greater than than 2% shareholders of an S-corporation may deduct the cost of health insurance for themselves and their families.  The deduction is limited to net profit or, in the case of an S corp shareholder, Medicare wages reported on the W-2 from that S corp. Qualified long-term care insurance premiums, subject to age limitations, are also deductible.

Penalty on early withdrawal of savings - These penalties, which are typically incurred when you cash a CD prematurely, are deductible. You will find this fee on your form 1099-INT. 

Alimony - Court ordered alimony paid is deductible, subject to certain rules. Your return must include the Social Security number of the recipient.

IRA deduction -  If you have compensation or self-employment income and are not covered by an employer plan, or meet certain income limitations, you may deduct contributions to a traditional IRA. For tax year 2014 you are limited to $5500 ($6500 if you are over 50). Roth IRA contributions are not deductible but possess other tax benefits.

Student loan interest - Up to $2,500 of the interest paid on a qualified student loan is deductible (subject to certain income limitations). You should receive a Form 1098-E from the entity to which you paid the student loan interest.

Tuition and fees deduction - Up to $4,000 of higher education tuition and fees can be deducted by taxpayers with an AGI under $80,000 if single, or $160,000 if married filing jointly.  It may be more advantageous for you to claim either the American opportunities credit or the lifetime learning credit.  All of these education benefits have different limitations and requirements.  .  You can find an in depth article on the credits under the education category of this blog.  Please discuss this with your tax advisor to claim the credit or deduction that is most advantageous for you