Small Business Tax Strategies

Smart small business owners save thousands of dollars per year on their personal and business taxes by taking advantage of the legal loopholes that the government creates for their unique tax situation. Small Business Tax Strategies cuts through tedious tax code to reveal the bonanza of completely legal opportunities to grow personal wealth and secure an enjoyable retirement.  Learn more about Small Business Tax Strategies and the two free reports you’ll get when you subscribe...

Is it time to take health care reform into your own hands?

Strategy: Investigate the benefits of Health Savings Accounts (HSAs). Although these tax-favored accounts have been slow to catch on with the public, it might make sense for your situation. If it does, sign up for an HSA whether or not health care reform is enacted.

Recent tax-law changes have already improved HSAs, so they’ve become more attractive to a wider range of taxpayers.

Here’s the whole story: The HSA often is called an “individual retirement account (IRA)” for medical expenses. Your contributions can be deducted above-the-line or your company may make tax-deductible contributions on your behalf—or both.

As with a regular IRA, there’s no current income tax on the earnings within your account. Furthermore, distributions are completely tax-free if you use the funds to pay for qualified medical expenses. However, taxable distributions are hit with a 10% tax penalty if they are made before you reach age 59½.

Who qualifies for an HSA? This technique is available to anyone who is not yet eligible for Medicare (i.e., someone under age 65), participates in a high-deductible plan and does not receive coverage under another health insurance plan. For 2009, a “high deductible” plan is defined as a plan with a deductible of at least $1,150 and out-of-pocket maximum of $5,800 for individual coverage; a deductible of at least $2,300 and out-of-pocket maximum of $11,600 for family coverage. These limits are indexed for inflation.

Key point: Prior to 2007, the maximum contribution you could deduct on your tax return was limited to the lesser of the amount of the annual health insurance deductible or an indexed dollar amount. For 2009, the thresholds are $3,000 for individuals; $5,950 for family coverage. (These figures are also adjusted for inflation.) In addition, a “catch-up contribution” of $1,000 is permitted for individuals age 55 or older (see chart below for the HSA limits for the past five years).

But a 2006 law eliminated the deduction limit based on your health plan deductible. Instead, only the higher dollar threshold applies. This could practically triple your current deduction. Note that the 2006 law also authorizes certain tax-free rollovers to an HSA (see box below).

What happens to unused funds in an HSA? Any amount remaining at year-end may be used to pay medical expenses in future years. Thanks to the higher contribution limits, you can now accumulate even more in your account.

Tip: This is a significant edge HSAs have over flexible spending accounts (FSAs) for health care expenses. Under the “use-it-or-lose-it” FSA feature, you forfeit any amount remaining in your account at the end of the year after a 2½-month grace period.

HSA limits continue to climb

The IRS adjusts the HSA contribution limits on an annual basis. Here’s a capsule summary of the past five years.