Health Savings Account Basics

Due to the rising cost of health care expenses, many employers have included High Deductible Health Plans (HDHP) in their benefit programs. A High Deductible Health Plan usually has a lower monthly premium than a traditional health insurance plan. However, the deductibles for this type of plan start at $1,400 for an individual or $2,800 for a family. To offset this cost, participants in these plans usually have the option to save their own money through a Health Savings Account. So, what are Health Savings Accounts and how do they work?

A Health Savings Account (HSA) is a savings account into which individuals can contribute money on a pre-tax basis to pay for qualified medical expenses. This type of account is said to have a “Triple Tax Advantage” which makes opening and funding one very attractive. The first advantage is that deposits into the account are exempt from Federal Income Tax. In addition, any investment gains and interest inside the account are not taxable. Lastly, if the funds are ultimately used to pay medical expenses, then the withdrawals from the account are also non-taxable. HSA annual deposits for 2020 are limited to $3,550 for an individual and $7,100 for a family. Those over 55 years of age may deposit an additional $1,000.

What happens if the funds are needed for a non-covered expense like elective surgery or a new car? Withdrawals for non-covered expenses will be subject to Federal Income Tax regardless of when they are taken. However, non-covered withdrawals before 65 years of age will be charged an additional 20% penalty fee.

It is important to note that covered expenses are not required to be reimbursed as they are incurred. This means that, if you can afford to wait to reimburse yourself and maintain the receipts/documentation, you can reimburse yourself at a later date for any expense incurred while your HSA was open. This allows you flexibility and control over when withdrawals are taken, which could potentially allow your money to grow even more.

*This information is not all encompassing. Please contact Clear Prosperity or your tax advisor to determine if a HSA is right for you.

Filing Taxes with COVID-19

As Americans were beginning to grapple with coronavirus and lockdown this spring, the government decided to postpone the April 15th tax filing deadline to July 15th. Now that the deadline is approaching, here are some things you should be aware of:

  1. Taxpayers must file or request an extension by July 15th, or they may face one of several penalties.
  2. You may request an extension via the IRS website that can extend your filing deadline to October 15th.
  3. Should you be granted an extension to file, it is not also an extension to pay. If you believe that your prior withholdings or other payments for 2019 were not enough, you may need to estimate what you owe and submit a payment before July 15th.
  4. If you cannot pay, know that the IRS does work with individuals to establish payment plans. It is important to remember that, according to the IRS:  “The failure-to-file penalty is generally more than the failure-to-pay penalty.”
  5. If you are owed a refund, the IRS is currently processing payments and most are submitted to taxpayers within three weeks. Further, if you file on time you may be do interest dating back to April 15th
  6. For taxpayers that file estimated taxes quarterly, the traditional first quarter and second quarter payments must be made by the July 15th deadline.  
  7. For those with simple returns or the “do it yourself-er” types, you can file electronically for FREE at the IRS website while being socially distant.  

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction