Top off your HSA by April 15 and save on taxes
If you didn't make the maximum contribution to your health spending account, you can still contribute and get a tax writeoff.
This post is by Ashlea Ebeling of Forbes.com.
Pay attention. You may still have a good way to cut your 2012 tax bill — and you probably don’t know about it. If you contributed less than the legal maximum to your HSA account through payroll deductions during 2012, you can still top out your 2012 contributions now and cut your 2012 taxes.
What? Your employer didn’t tell you about this? That’s not surprising, because you don’t make this after-year-end contribution through your employer. Instead, you send the money directly to the bank that holds the HSA account, just as you contribute directly to an individual retirement account. (If your HSA is administered through UnitedHealthcare and its Optum Bank, you may have gotten, and ignored, an email explaining how you can do this. Even if you didn’t get an email, your HSA administrator should be happy to take your money directly. If you can’t find directions on its site for how to do this, call and ask.)
HSAs come with a unique triple tax benefit: You sock away money pretax, it grows tax free, and when you take money out to pay for medical expenses, it comes out tax free. You can use HSA money to pay current medical bills or leave it growing tax free and use it tax free for uncovered medical and dental expenses in retirement.
"You can save a boatload of money in taxes," says Paul Fronstin, director of health research with the Employee Benefits Research Institute. And yes, millions of folks have more room to contribute for 2012. For 2012, you and your employer combined can put a total of $6,250 pretax into your HSA if you have family coverage, or $3,100 if you’re covered as an individual. On top of that, if you’re 55 or older, you can put in another $1,000 for each year until you’re eligible for Medicare.
Yet of those with individual insurance coverage, 15% contributed nothing to their HSAs in 2012 and 31% contributed less than $1,500, according to an EBRI report. (For 2013, you can contribute up to $6,450 for family coverage or $3,250 for individual coverage.)
One reason this after-the-fact play is useful to many people is that if you’re on a tight budget, you might not have wanted to lock up too much money in advance in an HSA. Your employer plan will define the rules around when and how frequently you can make changes in your payroll contributions going to your HSA, notes Maureen Fay, senior vice president in the Aon health and benefits consulting practice. But typically, you have to set your contributions before the start of each year (during "open enrollment") and then can only make changes if you have a "life event" like getting married or having kids.
Fronstin offers up a real life example of how useful contributing after the end of the year can be. Back in the fall of 2011, during open enrollment, a single woman he knows elected to divert $100 a month of her salary into her HSA during 2012. But she ended up incurring $2,000 in out-of-pocket expenses in 2012 – $800 more than what she had stashed away pretax. Now — before April 15, 2013 – she can add the extra $800 to her HSA earmarking it as a 2012 contribution (again, you can do this online with most HSA administrators) and deduct an extra $800. What if she’s short on cash? She can turn around and request a distribution from her HSA for the $800 to cover the expenses she incurred out of pocket in 2012.
In effect, you’re funneling your own money through the account in order to get the tax break, much as you do with a flexible spending account. The big difference is that with an HSA, unlike an FSA, you have the option of leaving the money in the account because there is no "use-it-or-lose-it" rule as there is with FSAs, and with an HSA you have the option of topping up your contributions after the end of the year.
Whether you contribute via salary deferral during the year or in a lump sum now, the end tax result is the same — every dollar you put in reduces your federal income tax bite and usually your state income tax bite, too. Even better, this is what’s known as an “above the line” deduction, meaning it is claimed on the front page of your 1040, before you calculate your adjusted gross income. With a lower AGI you might qualify for other tax breaks that are phased out for higher income folks—benefits like the deduction for interest on student loans and the $2,500 American Opportunity College tax credit.
Important note: Even if you apply for an extension and don’t file your 2012 tax return until October, the contribution to your HSA for 2012 must be made by April 15. You report your HSA contributions (both employer and direct) on Form 8889.
There’s yet another obscure option. You can direct some or all of your federal income tax refund into your health savings account by putting the routing and account number right on your tax return. For more details on splitting and directing your refund, see the instructions for IRS Form 8888.
Contributions that come in electronically from the IRS are counted in the year that they are received, so directing your 2012 tax refund into your HSA will count as a 2013 contribution. While this is an opportunity to boost your HSA contributions, be careful, warns Roy “Mr. HSA” Ranthun, who led the Treasury’s implementation of HSAs and now runs HSA Consulting Services. If you overfund your HSA, you must pay a 6% excise tax on excess contributions, although you can avoid the excess contribution penalty if you withdraw the excess contribution and earnings by the due date of your tax return, including extensions, for that year and report the earnings as income. You can download Ranthun’s "Common Sense Guide To HSAs" here for free.
Of course you get the biggest tax savings if you pay your deductibles out of pocket and leave the HSA money growing for years tax free. "If you took the time to set up an account, you should try to maximize it," says Jude Coard, a tax partner with Berdon LLP in New York, who sees HSAs growing in popularity among small business owners.
But not everyone has the cash flow to do that. So whether you’re looking for a long term tax shelter, or just to save a few bucks on taxes now, if you’ve got an HSA and room to contribute more for 2012, Uncle Sam has a special tax break for you.
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Comment: Nice reminder for annual contributions to your HSA account.
We are a provider of self-directed HSAs and have seen steady growth in the number of clients exploring the benefits of an HSA.
Most of our clients who can afford to pay out of pocket, make to much income to be able to deduct the medical expenses on Schedule A. For them we stress that they can defer reimbursements of those amounts (by the HSA) until they really need the money. The HSA has no requirement that expenses be reimbursed at any particular time. Thus, I can pay my $1,000 doctor bill today, but have my HSA reimburse me for it in 2020 or at any point in the future.
That leaves more tax sheltered money in my HSA for long term investing and tax free or tax deferred growth. Money accumulated can cover future medical costs in retirement or provide a back up retirement account (if not needed for medical costs).
Our clients can access any thing the IRS allows for investment with their Self-Directed HSA. We have seen HSAs owning real estate, private companies, gold, Koa Trees, and more, as well as more traditional stocks, bonds and mutual funds.
Having an HSA with a variety of investment options is becoming more important as the unspent balances in HSAs continues to grow.
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