 Income tax 2023-2024, health savings account HSA deduction. Get ready and some coffee because we're looking to get the tax man off our back with income tax preparation 2023-2024. Most of this information comes from the instructions for Schedule 1 section of the Form 1040 instructions tax year 2023 as well as instructions for Form 8889 health savings accounts HSAs 2023 which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're focused on line 2, adjustments to income. Remember in the first half of the income tax formula is in essence a funny income statement. Income statements typically having income minus expenses resulting in net income, here having income minus various deductions resulting in taxable income, deductions for taxes being good, therefore we're always looking to increase them if we can, noting the major differences in the categories of deductions, the adjustments to income or above the line deductions and the below the line deductions, standard or itemized deductions. One of those differences being that if you qualify for a above the line deduction or adjustment to income, you don't have to clear a hurdle such as the standard deduction before you get a benefit from those items. First page of the Form 1040, we're looking at line number 10, adjustments to income from Schedule 1, here is the Schedule 1 part 2 which is the adjustments to income were focused on line 13 which is the health savings account deduction and you can attach Form 8889, you can look at the instructions from Form 8889 for more detail as well. Alright line number 13, we have the health savings account, it's an HSA deduction, you may be able to take this deduction if contributions other than employer contributions, rollovers and qualified HAS funds distributions from an IRA were made to your HSA for 2023, there's more detail of course that can be found in Form 8889, that's the summary or line instruction, let's go into a bit more of that detail. A health savings account, what is it? It's a tax advantaged medical savings account available to taxpayers in the United States who are enrolled in a high deductible health plan that's an HDHP. Now some of this terminology is a little bit wonky and can get first a word from our sponsor. Yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us, but that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me I'm an accountant product line. Yeah it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Somewhat confusing and it kind of goes back to when they were trying to adjust everything during the Obama administration. You can you might remember that they had this big argument with the Obamacare and the kind of some of the details of it from my perspective was that they were trying to simplify the healthcare process and there's arguments in terms of how to better deal with that situation and the situation is going to be obviously the cost of healthcare is quite high and then the people that are able to get healthcare you want to make sure that everybody has the capacity to get healthcare. One of the arguments for why healthcare was high is because you have this free rider problem in that if people don't actually purchase healthcare then they still get they still do get health benefits because if they go to an emergency room or they have a problem they are going to typically be treated in which case that cost is basically taken on by the others that are paying for the premiums of the insurance which increases the insurance. So part of what they wanted to do is is force everybody to have health insurance and if you don't buy health insurance then they were going to basically penalize you and then they also part of the plan seemed to be that they wanted to centralize the healthcare with less competition and whatnot and rather try to make everything more streamlined and similar in nature. Now some of that kind of went through and some of it did not and we ended up with some of this terminology with regards to the types of health plans and so now you've got this idea of a high deductible health plan. Now high deductible deductibles are typically the idea of what you have to pay when you actually get the benefit from when you pay for healthcare. So if I go and pay for healthcare of some kind do I have to pay for it or is there going to be is it just going to be covered by the insurance? So that's tied in with the deductible and the idea of a high deductible plan is usually with younger people that are healthy the idea would be you might want more of a high deductible plan because you don't plan on going to regular doctor visits and whatnot and because you're healthy and you don't have as much health problems and then when you do get go to the doctor you you you can pay the higher deductible but you'll have lower premiums is the general idea. So from that perspective it's not like the best plan it's not like the plan that you would get from the a rich person would probably have not have a high everything would be covered type of thing. So the high deductible plan might be more likely to be lower income individuals that have the high deductible plan and then if you have a high deductible plan then you might also qualify then the government wants to subsidize those plans and that's when you might also be able to get these HSAs. So that's kind of a a general recap again from my perspective. So some of the terminology we need to know is are we dealing with a high deductible health plan and then how are we getting access to the health plan and if so you might have an HSA but there's also another problem that's also thrown into there and that is that you might have a credit if you have a high deductible health plan for related to health insurance and that credit might be prepaid and that's another complication to try to determine how much you're paying for for healthcare. Okay given that HSAs have several tax benefits that make them an attractive option for saving and paying medical expenses. Here's a breakdown of the tax advantages. So you have pre-tax contributions now you can think of this is another tool that you can think of as being similar to like an IRA. I compare it to an IRA because I think most people have a more of a better concept of an IRA and the tax consequences with it and the points of tax consequences that we're questioning are if I'm putting money into an HSA which we're imagining to be a savings account here it is a savings account there's nothing different about the investment tool itself in a similar way as there's nothing different about usually mutual funds that you're putting money into when you're putting money into an IRA that the fact that it's under the umbrella of an IRA doesn't change the nature of the financial instrument in that you're still just using a normal financial instrument it's just under the umbrella of an IRA or in this case an HSA which actually restricts sometimes the funds that you put into it which means you would not normally put funds into it unless there's a tax benefit so the question is when I put the money in do I get a tax benefit when that happens which would mean I would either lower income or get a deduction when the savings account earns money through interest or if it was dividends or whatnot do I have to pay taxes when it earns the money or possibly can I defer them or not pay the taxes and then when we take the money out of the account is that a tax triggering effect and is it something that could also trigger penalties or whatnot those are the tax consequences when I put the money in when the money grows when I take the money out what are the tax consequences all right pre-tax contributions contributions to an HSA are made with pre-tax dollars so meaning we're reducing the income which is good through payroll deductions which means they reduce your taxable income so if you make contributions with those pre-tax dollars you can deduct the amounts from your gross income on your tax return reducing your overall tax liability so note we have a general question here is is it happening through work if it's happening through work then possibly this will be reflected on the w2 form if it's not happening through work then it's not going to be reflected on the w2 form and therefore you might have this above the line adjustment so tax deductible contributions contributions you make to an HSA are tax deductible up to the legal limit for 2023 the IRS has set the contribution limits to 3850 for individuals and 7,750 for family coverage those over 55 years old can make an additional catch-up contribution of $1,000 so tax-free growth so here we're talking about the next component you put money in you get a benefit possibly when you put the money in what about when the money grows in the savings account through possibly interest for example so so usually you have to pay tax on interest right tax-free growth any interest or other earnings on the money in the HSA grow tax-free so it can get a good long-term saving strategy so tax-free withdrawals so that's the third part now what happens when we take the money out is that going to be subject to taxes in which case it would be a deferral if it's not subject to taxes and that's great you didn't have to pay the taxes on it at all right so funds withdrawn from the HSA for qualified medical expenses including deductibles co-payments and other expenses that health insurance doesn't cover are not taxed so there's the catch you have to then make sure that you're in compliance with the rules and then you have to pay for the things that are covered for and in order for it to qualify to be tax-free otherwise it might be subject to tax when you pull it out as we saw on the income side of things for HSA so if you withdrew funds for non-medical expenses before age 65 you'll have to pay income tax on the withdrawal plus 20 penalty ouch that's a high penalty after age 65 you can withdraw funds for any purpose without penalty but you'll still owe taxes if the withdrawal is not used for qualified medical expenses so note this is a little bit different than like an IRA right you're putting the money in and then usually with an IRA when you take the money out you have to pay taxes on it which means you've got a deferral but not a complete removal of taxes here if you take the money out and you pay for qualified education or qualified medical expenses then you might not have to pay taxes on it at all and then if you're out if you're older than 65 you might still have money in there that you want to pull out and in that case you might be able to pull it out without paying for medical expenses in which case you'd have to pay taxes on it which means you would have had a deferral similar to an IRA but if you pay for the qualified medical expenses you might not have to pay any tax on it okay ownership and portability and HSA is owned by an individual which means it's portable the account stays with you if you change employers or leave the workforce now this is one of the things that's been kind of a problem in the past as we've had changes societal changes over time it used to be that health care was often tied to a place of employment people often working for the same place for their entire life and those kind of benefits are can be great because there's things that you can give the employer can give but there are also things that lock people into a particular job it's difficult to go from one job to another if your entire pension and your health plan and everything is tied to that one job right that's that's a way that a job can kind of tie you into it as well so there's pros and cons of it so here they're saying the HSA is owned by the individual which means it's portable which means you know might leave you still free to to move to another job if you need to eligible individual so to be eligible to have contributions made to your HSA you must be covered under a high deductible health plan so here's one of the things that i i believe basically you know changed a bit when they were trying to do all that stuff to the the health insurance they tried to make this hardcore line definition of what it means to be a high deductible plan so consequently you should be able to determine the plans usually will speak quite clear that it is or does not a high covered or classified as a high deductible health plan and obviously if it is a high deductible health plan that you could think of it as bad or good because it means well there's a high deductible that's usually bad but then it qualifies for these benefits because they're trying to subsidize the bad plan because it's possible lower income individuals are going to have that plan so you could so you any case that's how it is and have no other health insurance except certain uh disregarded coverage so if you are an eligible individual anyone can contribute to your health savings account however you cannot be eligible in medicare or be another persons dependent so it gets a little bit confusing our health system note that you're paying for insurance but then when you reach eligibility for medicare then medicare is basically going to be you know one of the primary kind of insurance so you have that kind of interplay when someone's in their working years and whatnot they're going to have their own health insurance which might be a high deductible health plan and then there could be differences or whatnot when they become subject or able to apply for medicare so an individual does not fail to be treated as an eligible individual for any period merely because the individual receives hospital care or medical services under any law administrated by the secretary of veterans affairs for a service connected disability so you will not fail to be considered an eligible individual because you receive benefits from a health saving plan under surprise billing laws you must be or must be or be considered an eligible individual on the first day of the month to take an hsa deduction for that month see last month rule so what's the last month rule if you are an eligible individual on the first day of the last month of your tax year December 1st for most taxpayers you are considered to be an eligible individual for the entire year so long as you remain an eligible individual during the testing period as discussed below okay so what's the testing period so you must remain an eligible individual during the testing period in order to take advantage of the last month rule the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month for example December 1st 2023 uh to December 31st 2024 so if you fail to remain an eligible individual during this period other than because of death or becoming disabled you will not have to include in income the total contributions made that would not have been made except for the last month rule so you include this amount in income in the year in which you fail to be an eligible individual this amount is also subject to a 10 percent additional tax all right account beneficiary so the account beneficiary is the individual on whose behalf the hsa was established so obviously you're putting up an hsa a high deductible health insurance so who's the the person that you're putting that in place on behalf of hsa generally an hsa is a health savings account set up exclusively for paying the qualified medical expenses of the account beneficiary or the account beneficiaries spouse or dependents so then you have the technical issue of just basically setting up the hsa and obviously what is the actual hsa a health savings an hsa is a health savings account which is set up exclusively for paying the qualified medical expenses of the account beneficiary or the account beneficiary spouse or dependent distributions from an hsa so now we're talking about the money that's coming out of the hsa which again is the last point in time that we might consider is there going to be a tax consequence usually the question here being do we have to include anything in income and is it subject to penalty distributions from an hsa used exclusively to pay qualified medical expenses of the account beneficiary spouse or dependents are excludable from gross income so that's good so see the line 15 instructions for information on medical expenses of dependents not claimed on your return so you can receive distributions from an hsa even if you are not currently eligible to have contributions made to the hsa however any part of a distribution not used to pay qualified medical expenses is includeable in gross income and is subject to an additional 20% tax unless an exception applies so what are qualified medical expenses then generally qualified medical expenses for hsa purposes are unreimbursed medical expenses that could otherwise be deducted on schedule a form 1040 so you can look at the instructions for medical expenses on form 1040 which a lot of people don't have a lot of familiarity with because you might not be itemizing number one if your lower income or if you don't own a home at least and number two because if you do own a home and you are itemizing and your income is high then it also has a limitation that you have to clear or a floor that you have to clear but in any case you can look at those instructions see the instructions for schedule a and publication 502 medical and dental expenses now whenever we get into these expenses for like medical stuff it's kind of messy it's very messy because you can get a doctor to say that you need anything right look at look at these days they got they got doctors saying that you need to have fully functioning body parts that cut off and whatnot it's crazy so so you could find a doctor to say you could find a doctor to say that you need a trip to hawaii or something like that and they'll be like oh yeah that's a medical expense right but obviously you need a jacuzzi i need a sauna in my home that's a medic so these questions come up like all the time and there and there and sometimes there's court cases and people will argue as to whether it's a qualified medical expenses or not so you can go into the into the craziness of basically asking whether or not this or that thing qualifies as a medical expense but a lot of it has probably been mapped out if not in the law itself in court cases and whatnot where the iris is arguing over whether something qualifies as a medical expense or not this is also a weird area where people start to to treat things as diseases when when i think it would be detrimental to treat them as a disease like they start calling people obese as a disease even though even when they're not even weren't technically obese before which i think is not healthy to tell people that it's a disease because then they feel like and but then you get tax benefits from it if you call it a disease and like and it goes it's a mess any case as the hsa account beneficiary you can pay these expenses for medical care for yourself your spouse and your dependence so even though non-prescription medicines other than insulin do not qualify for medical and dental expense deduction they do qualify as expenses for hsa purposes the cost of menstrual care products tampons pads liners cups sponges or other similar products that made me a little uncomfortable to read that whole thing are also reimbursed for hsa purposes so amounts you pay for personal protective equipment such as masks hand sanitizer and sanitizing wipes for you your spouse and your dependence for the primary purpose of preventing the spread of of covet 19 are treated as medical expenses the cost of home testing for covet 19 for you your spouse your dependence is an eligible medical expense okay you cannot treat insurance premiums as qualified medical expenses unless the premiums are for long-term care so now we have the qualifications of health insurance which gets again kind of kind of tricky because you have basically you know the general health insurance which might be your high deductible plan that you're in but if you go over a certain age then you have the medicare kind of system that might be then the normal kind of insurance and then you have the long-term care insurance which is generally thought of insurance against being basically like needing full-time care of basic kind of things which is kind of a whole another thing in and of itself so health care contingent continuation coverage such as coverage under a cobra so if you leave your job and you have continuation coverage the cobra is supposed to help so you don't lose the insurance and then possibly need to purchase it again in which case it sometimes could be difficult to do possibly because of pre conditions and so on so health care coverage while receiving unemployment compensation under federal or state law or medicare and other health care coverage if you were 65 or older other than premiums for medicare supplemental policies such as medigap okay high deductible health plan and hdhp high deductible health plan is a is a health plan that meets the following requirements so you have the minimum annual deductible so for the self only 1500 for the family 3000 and then the maximum annual out-of-pocket expenses seven thousand five hundred and fifteen thousand so a lot of times when you hunt down the plans they're they're more pretty pretty explicit about whether they qualify or don't qualify say as a high deductible plan but there's that technical kind of of qualification for it figuring your hsa deduction the maximum amount that can be contributed to your hsa depends on the type of high deductible health plan coverage you have if you have self only coverage your maximum contribution is 3850 if you have family coverage your maximum contribution is 7750 note if you are age 55 or older at the end of your tax year you can make an additional contribution of 1000 your maximum contribution is reduced by any employer contributions to your hsa any contributions made to your archer msa and any qualified hsa funding distributions you can make deductible contributions to your hsa even if your employer made contributions however if you or someone on your behalf made contributions in addition to any employer contributions and qualified hsa funding distributions you may have to pay an additional tax so you cannot deduct any contributions for any month in which you were enrolled in medicare also you cannot deduct contributions if you are someone else's dependent for 2023