In its waning days, the 109th Congress authorized sweeping changes for Health Savings Accounts (HSAs) as part of the Tax Relief and Health Care Act of 2006.
Strategy: Give HSAs a second look. Significantly, you might be able to sock away hundreds of dollars more in an HSA than you could before …and write off that amount, to boot!
HSA changes took effect on Jan. 1.
Here’s the whole story: HSAs are like IRAs for medical expenses: They allow you to deduct HSA contributions above the line, or your company to make tax-deductible contributions on your behalf … or both.
You pay no income tax on the earnings within your account. Best of all, distributions are completely tax-free if you use the funds to pay for qualified medical expenses. (Taxable distributions, though, generally are hit with a 10 percent tax penalty.)
HSAs are available to anyone who:
- Isn’t yet eligible for Medicare (under age 65).
- Participates in a high-deductible plan.
- Doesn’t receive coverage under another health insurance plan.
For 2007, a “high-deductible plan” means one with a deductible of at least $1,100 and an outof- pocket maximum of $5,500 for individual coverage; and a deductible of at least $2,200 and out-of-pocket maximum of $11,000 for families.
Key change: The new law raised the maximum HSA contribution for 2007 to $2,850 for individuals and $5,650 for family coverage, eliminating a prior limitation based on your health plan deductible and months of coverage under a qualifying health plan. In addition, people over age 55 can make a “catch-up contribution” of $800.
This could be a bonanza for taxpayers with health insurance deductibles at or near the required minimum levels and is expected to spur greater interest in HSAs.
Among other technical modifications, the new law also authorizes certain tax-free rollovers to HSAs.
What happens to unused funds in an HSA? Participants can use any amount left over at the end of the year to pay medical expenses in future years. Thanks to the new limit, you can now accumulate even more in your account.
Tip: Unlike the tax breaks the new law extended, these new HSA provisions are permanent.
- Small Business Tax Deduction Strategies No matches