Taxpayers and business owners are always looking to make wise money choices.
One option to consider is adding money to your HSA (health savings account). In order to have an HSA, you must have a high-deductible health insurance plan, not an HMO or PPO plan.
HSA contributions allow you to put aside pre-tax dollars for future medical expenses. Distributions from your HSA can be tax-free as well.
Using your HSA as a tax-planning tool
Did you know HSA earnings (such as interest and dividends from the money contributed to an HSA) are tax-exempt at the federal level?
You do have a limit on how much you can add to your HSA. Contribution limits for 2022 are $3,650 for self-only and $7,300 for families. The annual “catch-up” contribution amount for individuals age 55 or older will remain at $1,000. Consumers can contribute up to the annual maximum amount as determined by the IRS. Money contributed by your employer does count toward these thresholds.
HSAs achieve tax savings in other ways as well. You will accumulate earnings and income and can roll over the account year-to-year, unlike flexible spending accounts, where contributions are lost if they’re not used that year.
Withdrawals from an HSA are tax-free as long as you use the money to pay for qualified medical expenses (the IRS has a specific list of qualified expenses). Money held inside an HSA can be withdrawn at any time for medical expenses.
Basically, an HSA helps you build tax-free savings for future medical expenses as you age. One caveat: Individuals enrolled in any part of Medicare may not contribute to an HSA, although HSA funds contributed earlier may be used to pay for qualified medical expenses on a tax-free basis.
HSAs offer people with few medical expenses a tax deduction upfront in the year that contributions are made.