Health Savings Accounts(HSA) are a great deduction but be careful!

Health Savings Accounts(HSA) are a great deduction but be careful!
By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-687-9900 x101

I just recently spoke with one of our wonderful clients (I will call him “Dan”, his wife “Debbie” and their dependent college student son, “Darrell) regarding starting a Health Savings Account for 2012.

The downside of HSAs are that you must have a high deductible health insurance plan and not covered by another type of health insurance plan like an HMO or PPO. I believe that the CPA tax preparer should make sure that the HSA plan is really a HDHP!

Dan does not qualify for a HSA because he has received medicare for the entire year. His wife Debbie is not receiving medicare and has a high-deductible savings plan. Debbie has a son Darrell who is 19 years old and a full time student.

I “experimented” with the tax software using a copy of the 2011 tax returns. We have one of the best tax programs (with a high price tag) which gives us suggestions on how to avoid errors and increase tax savings. I showed that Dan was covered by Medicare for the entire year and that Debbie and son Darrell were in a family HSA plan. The tax software correctly gave Dan and Debbie a tax deduction of $7,150 for 2011. I then experimented by removing Darrell as a dependent and still showed family coverage for Debbie. The tax program still showed $7,150 which would be incorrect. Therefore, it is up to the tax preparer (my firm and me) to make sure that I get a copy of the HSA plan showing that Darrell is covered under Debbie’s HSA. If I fail to do that and the HSA plan does not cover Darrell, Dan and Debbie will have tax and penalty due (overfunding a HSA) should an IRS audit occur!

Health savings accounts (HSA) are tax-deductible savings plans that allow a taxpayer to save pre-tax dollars for future healthcare expenses. HSA are paired with high-deductible health insurance plans. Contributions to an HSA are tax-deductible. Earnings, such as interest and dividends, in the health savings account are tax-exempt at the federal level. Withdrawals from a health savings account are tax-free as long as the funds are used for qualified medical expenses. (See IRS Publication 502, Medical and Dental Expenses for what counts as qualified medical expenses.)
HSA Contribution Limits:
• For 2012: $3,100 maximum contribution for individual coverage; and $6,250 for family coverage. $1,000 for additional catch-up contributions for people age 55.

Form 8889 is used to prepare the HSA contributions and unfortunately to show penalties. you have a health savings account (HSA), it is up to you to retain proof that withdrawals from the account were for qualified medical expenses. Keep the following records along with the copy of your tax return:

•Receipts for prescription drugs and medicine
•Doctors’ notes for over-the-counter medication
•Receipts for medical equipment
•Proof of payment for permissible health insurance premiums
•Proof of payments to cover deductibles and copayments for your high-deductible health plan

Please let me know if you have any questions.

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com