Medical expenses have always been on the rise. But due to recent legislation they have been in the forefront of people’s minds a lot lately. While many employers are still providing good health insurance as a benefit to their employees, the employee still wants to make the most of his or her money. Rather than just spend their money out of pocket until they meet the deductible, they can open a health savings account.
There are two ways to deduct medical expenses off of your taxes. You can have significantly high medical bills totaling over 7.5% of your income. Or you can use a tax-advantaged savings plan like a health savings account. Most people will never spend enough on medical bills to meet the 7.5% of their income rule. Instead, many will opt for one of two types of health savings plans.
An individual health savings account (HSA) has a few rules attached to it, so not everyone is eligible. Primarily, the individual must be enrolled in a high deductible health plan (HDHP). These plans are those with a deductible of over $1,200 for individuals or $2,400 for family plans. If this requirement is met, then the individual can put in up to $3,100 per year ($6,250 for family plans), and write the entire amount off his or her taxes. The money then must be used to pay qualifying healthcare costs (insurance premiums do not qualify). The easiest way to open one of these accounts is to simply go into the bank or credit union where you already have a checking or savings, and ask if they offer it. Most do, and they operate just like a savings account and can be linked up to your regular checking or savings. The difference is you cannot initiate deposits; the banker must do that to make sure you are not going over your yearly contribution limit.
For those who are part of a group health insurance plan, they can still get around paying some taxes on the money they spend on medical bills. Many employers offer cafeteria plans, or flexible savings accounts (FSA’s). These plans take the money out of the paycheck, pre-tax, and set it aside to be spent on medical costs. Like all plans there are certain stipulations that apply. The biggest drawback is the individual must use the money, or forfeit it at the end of the year. In order to get started a visit with your company’s HR director will let you know when you can enroll (usually once or twice a year). The enrollment process is as easy as filling out a form an indicating how much is to be withheld (up to $2,500 per year).
There are ways to deduct medical bills without meeting the 7.5% rule. Nearly everyone has access to one of the two types of plans, and nearly everyone could stand to take advantage of them. They are easy to open, easy to fund, and easy to use. In fact with an HSA you can still pay your bills with a credit card, and then use your health savings account to reimburse yourself. If you are still paying taxes on the money you spend on medical bills, now is the time to look into an HSA.
This article was first published on http://moneyprime.com.