Health Savings Accounts (HSA)
Are you one of the growing number of employees who find themselves with an HSA as part of your health insurance offering by your employer?  Do you take full advantage of your ability to make a contribution?

First of all, if you are eligible for an HSA, that means that you also have a high-deductible health plan which is a requirement for you to have an HSA in the first place.  If your employer opened this account for you, you may not have taken the time to learn about it's features and then find yourself with questions at tax time.

It's an especially good benefit if you earn a good income and find many of your tax deductions and exemptions limited in one way or another.

Here is how an HSA works and why it's such a valuable tax deduction.

Contributions

The interesting thing about contributions is that both you and your employer can make them and they can be made both before and after tax.  Understanding this difference is key to reporting the contributions on your tax return and taking the maximum deduction that the law will allow.

Employers many times will make a contribution to your account on your behalf.  These contributions are pre-tax and count against the limit that you are allowed to make overall.

Employee contributions can also be made through the payroll process.  This is the case where you elect to have some of your paycheck diverted into your HSA account.  This contribution is also made with pre-tax dollars in the same way you contribute to other accounts before tax, like your 401k.

All of the pre-tax contributions are totaled up so they can be compared to the overall limit.

What is Your Limit

There are different limits depending on your filing status.  For a single person, under the age of 55, that limit is $3,350.  The highest limit is reached if you are 55 or older and have family health coverage, with a limit of $7,650 in 2015.  Everyone else is somewhere in the middle.

For example, if your employer contributed $2,000 through your paystub that leaves $5,650 ($7,650-$2,000) if your limit is the highest for 2015.

Tax Time

You have until the tax filing date to top up your contribution by contributing the remaining amount of $5,650 in this example.  When you make a contribution directly to your HSA, you are using after-tax dollars or money that has already been taxed when you earned it.  Because these dollars are after-tax, you are allowed to take a deduction on your tax return using form 8889.  If you are in the 25% marginal tax bracket, this $5,650 contribution will reduce your tax bill by $1,412.50.

High Income Benefit

If you are in a higher tax bracket, not only is the dollar reduction on your taxes bigger, but its not limited by other things such as the pease limitation or the personal exemption phaseout (PEP).  These limitations kick in when your income is north of $250,000 as an individual filer and $300,000 if you are married filing jointly.

While these and other taxes on high income are a fact of life, the HSA has no such limit.  If you make $300,000 or more and contribute $5,650 to your HSA, you will get the full benefit of a reduction in your tax bill.  If you find yourself in the 33% tax bracket, that will be a reduction of $1,864.50 on your tax bill, not reduced by any limitations.

Cherry on Top

In Pennsylvania, there is one more piece to the story that should not be overlooked.  Pennsylvania doesn't allow itemized deductions in the same way that the IRS does.  However, one of the few deductions that is allowed on your PA return is a deduction for your HSA contribution.  No limitation to the deduction on your Federal return and one of the very few deductions on your PA return is a pretty good deal.

Like many things in the management of your finances, this all depends on having the cash flow to be able to make the contribution and then to report the contribution properly on your tax return.  Making sure you take advantage of this low hanging fruit is one of the multiple ways that you can reduce your individual tax bill.  These are the kinds of things that we help clients with every day.