Turn Your Medical Expenses Into a $7,300 Tax Break

But health bills are inevitable because you never know when your health will deteriorate, and your health is one of those expenses you really can’t put off.

Luckily, in certain scenarios, you can make your medical bills work for you, including certain tax benefits. Here’s one way you can turn those medical annoyances into up to $7,300 in tax breaks.

In late 2003, lawmakers passed the Medicare Prescription Drug Improvement and Modernization Act, which introduced Health Savings Accounts (HSAs). HSAs are bank accounts dedicated specifically to healthcare spending. They also offer a nice tax benefit as monies deposited into these accounts are not taxed and can therefore reduce your overall annual tax liability.

However, there are very specific conditions that are set for someone to qualify for an HSA. Must be in a high-deductible health plan (HDHP), defined by the Internal Revenue Service (IRS) as a plan with a minimum deductible of $1,400 for self-insurance or $2,800 for family insurance. Deductibles are the amount you pay annually for healthcare before your insurance starts paying the bills.

In addition, the IRS also requires your HDHP to have a maximum annual deductible and other expenses of $7,050 for individuals or $14,100 for family insurance. This is the total amount you spend on deductibles, co-payments and co-insurance for services provided on your insurer’s network.

Be careful in this case as some plans may have a higher maximum than what is allowed for an HSA. For example, this year the maximum cap for out-of-pocket plans on healthcare exchanges is $8,700.

Once you figure out whether you qualify for an HSA or not, it’s very easy to open one, as many financial institutions offer these types of accounts. Then you can simply load money into the account and use it to pay for qualifying healthcare expenses. An HSA can cover many types of expenses, but some common ones include dental work, co-payments for doctor visits, prescription drugs, and physical therapy.

However, remember that once the funds are in your HSA, you must use them for qualifying medical expenses. For withdrawals that are not used for qualifying medical expenses, you not only have to pay income taxes, but also an additional penalty tax of 20%. Once you turn 65 you can withdraw funds without the additional 20% penalty.

Once you determine that your HDHP qualifies for an HSA and set up an account, you can contribute up to $3,650 annually as an individual and up to $7,300 as a family HDHP plan. This money reduces your tax burden.

It’s also a great idea to contribute to your HSA even if you don’t have any medical expenses because then you’ll be prepared if and when you do and can invest the money until you need it.

But if you don’t have enough savings to comfortably contribute the maximum each year, you probably shouldn’t, as you could face penalties for withdrawing funds that aren’t intended for qualifying medical expenses.

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