 Hello and welcome to this session in which we're going to be looking at the health savings account deduction, which is part of your adjustments to arrive to adjusted gross income. Simply put, health savings account, the HSA account is an adjustment to a GI. That's the first thing you want to understand. And it happens to be on line 12 on schedule one for the tax form year 2020. You know, if you're in 2021, 2022, 2023, it could be in a different place. But the idea is if it exists, it's a deduction to a GI. So simply put, after you determine this amount, let's assume it happens to be $2,000 for the sake of illustration. What's going to happen? You're going to add all your adjustments and that's assumed that's the only adjustments. That's $2,000. This $2,000, it's going to flow to your 1040. Again, this is for 2020. And it's going to be part of your adjustment. So it's going to go to schedule one line 22. And you're going to have a deduction of $2,000 to a GI. So simply put, let's assume you have income of $50,000 minus your adjustments of $2,000. Your adjusted gross income, which is an important number, is happens to be $48,000 for the sake of this illustration. So remember, health savings account is an adjustment to a GI. First, it's listed on schedule one, then it gets transferred to your 1040 as part of your adjustments. Now, that's not the only adjustments. We looked at other adjustments. For example, we looked at student loan interest deduction. We're going to look at tuition and fees. We're going to look at alimony paid, penalty, so on and so forth. We bunch them all together, but this is the idea. Now, before we start, I would like to remind you, whether you're an accounting students or a CPA candidate, please take a look at my website, farhatlectures.com. I don't replace your CPA review course. I don't intend to do so. I cannot do so. But I can be a useful addition to your CPA review course. I can add 10 to 15 points to your CPA review course by explaining the material differently, maybe better, maybe not better, but at least differently than your CPA review course. Your risk with me is subscribing for a month, checking me out, see if I can help you, because all my courses are aligned with your CPA review course. Your potential gain is passed in the exam. Are you willing to take that risk? And if not for anything, take a look at my website to find out how well your university doing or not doing on the CPA exam. In addition to my tax courses, I do cover other courses. Please connect with me on LinkedIn if you haven't done so. Please like this recording on YouTube and only then you can see how other students used my system to pass the exam and connect with me on Instagram and Facebook. So let's go ahead and start to talk about the health savings account. So what is the big idea? Well, simply put, a health savings account is a tax exempt savings account. What does that mean? It means you can put money away in that account. It's like a savings account. You can invest this money, but it's tax exempt. And it's not only tax exempt, it's tax exempt on the way in and tax exempt on the way out. What does that mean? It means the money that you put in a health savings account, it doesn't get taxed. So let's assume you put $1,000 away in that account. Guess what? You reduced your taxable income by $1,000. Now, this $1,000 you invested in this account and made another $100. Now you have $1,100. As long as you use this money, this $1,100 I just made up for qualified medical expenses for yourself, for your spouse or your dependent. Guess what? You have no taxes. It's a deduction for AGI. I showed you this. It gets deducted for AGI. So the contribution also grow tax-free. Remember, we put $1,000? Then we made it $100 because we invested this money. Therefore, $1,100. Now, your contribution will grow tax-free and the distribution is not taxable again as long as it's for qualified medical expenses. So notice here, you have really double benefit. And the reason I say double benefit in contrast to your retirement account, which we'll talk about later. For your retirement account, if you put your money away, okay, it grows tax-free. You don't pay taxes on it if you put your money in 401K, for example, a qualified retirement account. But when you distributed, it's taxable. For health savings account, it's a double benefit. It goes in tax-free. It goes out tax-free as long as it's for qualified medical expenses. Now, who's eligible to have an HSA? Well, you have to be under 65. Simply put, if you qualify for Medicare, you don't qualify for it. You must be self-employed. If you are an employee or a spouse of an employer who maintain a high deductible plan, and we're going to talk about what high deductible plan is shortly because we have to understand this concept, or an employee of a company that has no health coverage and the employee has purchased a high deductible policy on his or her own. Simply put, whether you bought this, what's called high deductible plan yourself, or you work for a company, but you bought it as part of your employer, as long as you have a high deductible health plan. And we'll explain the concept shortly about this high deductible health plan. The individual cannot have other health insurance except for coverage, for accidents, disability, dental care vision. So you could have other type of insurance, but not health insurance. So you could have other ones like accidents, disability, dental vision, long-term care and workers' compensation. That's fine. The taxpayer cannot be enrolled in Medicare, as we said, if you have to be under the age of 65, and you cannot be claimed as a dependent on someone else's reader. So those are some of the rules. You don't need the permission from the IRS to establish an HSA. If you don't establish it in HSA, you want to make sure you qualify, and if not, if you get audited, you'll be in trouble. In order to set up an HSA, you have to work with a trustee, either a bank or an insurance company, that's going to maintain that money for you, serve as a custodian of the account, and at the end of the period, they will send you reports about how much you contributed, how much was distributed. So this way you could report this on your tax return, and we'll take a look at those forms at the end of this recording. But the key in this is to understand what is a high deductible health plan. So to qualify, one of the procedures is you have to have a high deductible health plan. What is a high deductible health plan? It's a health plan, basically a health insurance policy with a specified minimum deductible amount and a maximum annual deductible amount and out-of-pocket expense limitation. What does it mean out-of-pocket? It means you have to pay this money. Out-of-pocket expense represents the amount the health plan requires the policyholder to pay other than the premium. So remember, you have, for example, if you have an insurance policy, you might have to pay a premium of, let's assume, just $100 a month. That could be your premium, or $1,000. It doesn't matter. Well, that's your premium. That's your cost. Now, because you have this insurance policy, you go to a doctor, you still have to pay. You have to pay out-of-pocket. Out-of-pocket. You go to visit a doctor. Maybe they will charge you $20. Maybe you go visit a specialist. They will charge you $50. So you still have to pay. This is called the copay. Also, in addition to the copay, you might have what's called amount that you have to pay upfront. So before the insurance kicks in, you have a high deductible. It means you have to pay a certain amount of money upfront before your insurance kicks in. So what is the idea of a high deductible health plan? So it's important to understand the concept, and it's easy to understand what we are dealing with here. It's a health insurance plan with lower premium and higher deductible. Let's assume you are healthy. You are a healthy individual. If you assume you are healthy, and nobody knows, I hope we are all healthy, but you don't know what's going to happen with you. But let's assume you're young. What you do is, and you need some type of insurance, you would say, look, I will buy an insurance policy, but I'm going to choose a high deductible health plan. What does that mean? It means the premium is lower. So rather than paying, for example, $400 a month, you will pay maybe $250 a month in premium. Every month you have to pay a premium of $250. But here's what's going to happen. The person with $400 a month, maybe they have a low deductible. What does it mean low deductible? It means after they pay, let's assume they got sick, and after they pay for the sake of illustration, $600, the insurance will kick in and will start to cover their expenses. For this individual, because they have a high deductible health plan, I'm just making this number up. For example, they might have to pay the first $2,000 before their insurance starts to kick in. So this individual, they're assuming, I'm not going to get sick. So why should I pay the $400? Let me pay the $250. At least I have coverage. And in case something happened, I'll have to pay the first $2,000. So that's the idea of it. It will lower your premium, and you're taking the risk, not risk. You're basically making a calculation in your mind that, look, I prefer to pay a low premium because I'm healthy. I'm relatively healthy, therefore I don't have to worry about that. So for individual, what's considered high deductible plan, you have to have a minimum deductible of $1,900. And once you reach $6,900, then the insurance will kick in for family. If you have a family, the minimum deductible is $2,800. And obviously those numbers, because every time you see the year for a particular year, those will change. So in 2021, 2022, those might go up, they might go down, just bear that in mind. So don't get nervously, and my numbers are not matching the CPA review course or my textbook. It's because it's for a different year, but the idea should be the same. Now, you can contribute to this health savings account, but also your employer, they can contribute to that health savings account. So how much can you contribute? So how much can you put, how much can you put money away? Okay, if you are an individual, you can, and under $55, above $55, you can contribute a little bit more because above $55, you assume you might need more medical expenses. You can contribute $3,550, a family coverage. You could choose a family coverage plan and you can contribute $7,100. And that's a quite a bit of money. Simply put, if you can put away $7,100 and you know you are going to use it for health expenses, let's assume for the sake of illustration, your tax return, your tax rate is 20%. Well, you save this much money, 20% times $7,000, which is 20% times $7,000, oops, sorry, is $1,400. So you would save approximately $1,420 in your taxes if you do put it away. And especially if that $7,100 earned any interest or any profit, any return, that's also tax-free. The extra amount that you made in profit, you don't have to pay taxes on it. So it does benefit individuals as long as you can use it and you qualify for it. And that's the idea of a health savings account. So you have a high deductible plan. Therefore, to pay for the high deductible plan to meet your dose minimum deductible amount, they allow you to put some money away tax-free. So notice if the taxpayer is above $55,000, they can contribute an additional $1,000. Again, what's the idea is you might have more expenses, medical expenses, therefore you can contribute a little bit more. This assumes only that one spouse has an HSA. If more than one spouse has an HSA, then it gets a little bit more complicated. It's beyond the scope of this course. Also, what you need to understand, individuals are now allowed to make one-time contribution to an HSA from your IRA. So simply put, if you have an IRA in the individual retirement account, one time in your life, then what you can do is you can take some money from your IRA, which is, remember, IRA, individual retirement account is some money you put away for retirement. They would allow you to take this money and transfer it as long as that transfer, trustee-to-trustee transfer, simply put, you're not supposed to touch the money. The money goes from your IRA account to your HSA account. So you can make that one-time contribution. Now, amount distributed from the IRA are not included in the individual income as long as you meet all the requirement. Why? Because you are transferring it from a retirement account. You want to use it now for health savings account to pay for your medical expenses. You are allowed to do so. And they're not subject to a 20% additional tax for early distribution. Because if you get your money out of the IRA, early distribution, there's a 20% penalty. Now, what happened if you don't use it in the HSA for the right purpose, then you will have a penalty. But again, it's beyond the scope of this course. All you need to know is one time, one time is a one-time event. You can transfer money from your IRA to your HSA. So now, an individual who becomes covered by a high deductible plan during the year can make a contribution if he or she was eligible for the entire year. So let's assume you were eligible in September. You could still make the full contribution as if you were eligible as of January 1st. So you can have the full contribution, whatever it is, 3,550 or 7,400. When can you make this contribution? The contribution should be made by the due date of the tax record. I hope you know the due date of the tax return. For example, in 2020, the due date for the tax return is April 15, 2021. So as long as you make this contribution before April 15, 2021, it will be counted toward year 2020. Now, if your employer contributes, so you work for a company and part of the benefit, they will contribute to your HSA. Well, guess what? The amount is not deductible because you did not pay anything. If your employer paid it, it's not deductible. At the same time, it doesn't get included in your income. So they don't add it to your W-2. Although it's not deductible, but basically the same concept. It's not taxable to you. They don't show it to you. They don't show it on your W-2. Now, the fund and the account. Once you have that money in the account, you are allowed to accumulate it from year to year. And the interest and earning, again, tax-free. So you can have it there, earn interest, and that's the beauty of it. It's the money that goes in tax-free. The earnings tax-free, as long as you use it for medical expenses, it is tax-free as well. Distribution. Distribution from an IRA, as I said many times, as long as it's for qualified medical expenses, it's tax-free as well. And you have to fill out form 88, 89. There's a part one and part two. And we're going to see this on the next page. It's used to report the amount of the deduction that's reported online 12 on schedule one. This is what I showed you at the beginning. And that form must be attached to your tax return. So if you're filing a return and you will see in a moment on the form, and maybe you noticed that it has to be attached to your taxes. And some forms has to be attached. This is one of them. Okay. And this form is also used to report your taxable and non-taxable amount from the distribution. So it breaks them down. It shows the IRS which amount is taxable, which amount is not. Again, if you want more information, you want to refer to Publication 969 about the HSA accounts. Okay. Again, the funds are exempt from taxes and the employee is 100% vested immediately. So you don't have to put the money and wait until it's vested. Once you put the money, once it's in there, then you can take it out as if it's vested. You don't have to wait a period of time for that money to be used for the qualified medical expenses. And what happened if any amount remained from year to year? That's fine. The amount is carried over. It's not included in income or anything like that. Now, if you pass away, it goes to your spouse. If your spouse passes away, then it becomes part of your estate. But again, that's beyond the scope. I mean, what I'm showing you here is information that you need to know either for your income tax scores or for your CPA exam. But obviously, there's always much more, but this is basically we're only scratching the surface. And that's all what you need to know as an either a tax student or an accounting student or a CPA candidate. Again, what's going to happen? This is the 88 89, there's part one, part two, and don't worry about part three. This is if you don't maintain high deductible health coverage for the whole year, you have to do some probation. And basically every year, a trustee, which is normally a bank or an insurance company that administer the HSA, they are required to send you this form, which is 5489 SA. And this shows you how much you contributed, how much you contributed. And this part here will help you fill out part one, and it will also send you another form, 1099 SA. It shows you the distribution from the HSA, any distribution from the HSA. They will show you here the distribution and the distribution codes basically that it's for eligible medical expenses, how much earning on access contribution, and this will help you fill out HSA distribution part two of the four. And this is basically all what you need to know for health savings account HSA, as far as if you are an accounting students or a CPA candidate. Once again, I strongly invite you, strongly encourage you to visit. I want to invite you to visit my website, farhatlectures.com. If you are looking to study for the CPA exam, I can give you an alternative explanation as well as the enrolled agents exam. I can give you an alternative explanation for these topics. Good luck, study hard, and most importantly, stay safe.