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Slash taxes with new Health Savings Accounts

Medicare reform law spawns great new tax-favored option for small firms

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in Small Business Tax

You probably saw all the fanfare this month surrounding President Bush's signing of the Medicare reform law, the biggest rewrite of Medicare in its nearly 40 year history.

But, unless you're on Medicare, you probably thought the Medicare Prescription Drug and Modernization Act of 2003 contained nothing for you. Well, you were wrong.

In fact, the law includes a sweet new tax break that could benefit self-employed folks, small business owners and their employees. The law authorizes Health Savings Accounts (HSAs), a new kind of "medical IRA."

Money contributed to an HSA is tax-deductible and withdrawals may be used to pay for a wide variety of medical purposes. Unlike flexible spending accounts, HSAs are portable between jobs, and the money can accumulate in that account and carry over from year to year.

HSAs let Americans better manage their health care spending and are designed to supplement employer-sponsored health insurance coverage.

These new accounts replace the old-fashioned medical savings accounts (MSAs). As you'll see, HSAs are much better than MSAs. The new law kicks in starting 2004.

For more details and advice on ways to take advantage of that new break, including how people age 55 and older can benefit even more, see our Special Report on pages 4 to 6.

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