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The Online Advisor

September 2007


What's New in Taxes

An HSA might be the right prescription now


Health Savings Accounts (HSAs) are tax-sheltered accounts that, when combined with a high-deductible health insurance plan, allow a tax deduction for contributions made to the HSA. HSAs have been around for some time, but new legislation passed at the end of 2006 makes them an even more powerful tool with which to pay medical bills.

* Deductible contributions
Essentially, the contribution to an HSA is deductible annually up to $2,850 if you’re single and $5,650 if you’re married. An additional $800 can be contributed if you are 55 or older.

These deductions help to reduce your current income taxes. Funds with-drawn from the HSA to pay medical bills are not treated as taxable income to you. It’s the best of all possible worlds: you receive a deduction for the contribution to the HSA and don’t have to recognize income when qualified medical payments are made by the HSA.

* Eligibility requirements
In order to qualify, you must participate in a high-deductible health policy (HDHP). This simply means that the deductible on your health policy can’t be less than $1,100 for self-only coverage and $2,200 for family coverage.

These are minimum deductible limits, and you’re free to participate in a health plan with higher limits and still qualify for an HSA. However, the maximum out-of-pocket expenses (including deductibles and co-payments, but not insurance premiums) can’t be more than $5,500 for self-only coverage or $11,000 for family coverage. All of the limits noted are for 2007; these limits will be adjusted for inflation in future years.

* New rules
In addition to raising the HSA deduction limits, the 2006 legislation also changed two other rules.

You can now fund your HSA with IRA money. You can make a transfer of funds from an IRA to an HSA without realizing any income or penalties for such transfer.

Also, if your employer maintains a flexible spending account (FSA) or health reimbursement account (HRA), you can transfer these funds to an HSA. A transfer from an FSA could make a lot of sense when FSA contributions can’t be used up and would otherwise be lost.

In both cases, the transfer can’t exceed the annual contribution limits, and it can only be made once in your lifetime.

Many taxpayers will benefit from the changes in the HSA rules and should consider using an HSA to help control the cost of health care. If you need assistance in analyzing the use of an HSA in your situation, please call us.


For details or for assistance with your tax planning, give our office a call.

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