Do You Want Tax-Free Money For Healthcare Cost?

Healthcare cost

We all have healthcare cost. We all hate paying taxes. Why wouldn’t you use either an FSA or HSA plan?

Let me first paint a picture. Which scenario would you like, it’s completely up to you?

Scenario 1

Bob is a hard-working family man and makes $100,000 through his employer. He doesn’t use an FSA or HSA plan and instead pays for medical out of pocket cost on his own.

His tax bill at the end of the year is 25% of his AGI, which for simplicity sake we will say is $100,000.

Bob’s taxes are $25,000 this year.

Scenario 2

Steve is smart, kind of hardworking family man and makes $100,000 through his employer. He uses an HSA and max funds it for the limit for a family which for 2014 would be $6,550. He also has a kid in preschool and after school activities of which he contributes $5,000 towards a Dependent care FSA.

His tax bill at the end of the year is 25% of his AGI which keeping with simplicity, would be $88,450.

Steve’s taxes are $22,112 this year. 

Again, which scenario do you like? Do you see the power of using these Health tools?

Both an HSA, and FSA create a tax free benefit. Whether you are self-employed or you are employed through a big company taking advantage of these tools should be a no-brainer right?

You decide. Here’s a breakdown of the advantages and disadvantages of each

FSA – $2,500 limit for 2015

Advantages

  • No reporting requirements. This means that once you set up an FSA contribution there is no need to report it on your tax return like you would with the HSA.
  • Contributions can be excluded from your taxable income. Money goes in pre-tax comes out tax-free with qualifying medical expense.
  • You select the amount you would like to contribute. This amount is deducted from your paycheck and goes towards your overall FSA plan.

Disadvantages

  • You can’t change your election, only if your family situation changes or you change employment status.
  • Use it or lose it coverage, with one caveat. Through new rules implemented this year your employer may now allow you to roll over $500 every year to the next year.
  • Also, the plan/employer may allow up to 2.5 months after the calendar year to use the funds before you lose them.
  • Keep in mind the employer can allow one or the other, either $500 rollover or 2.5 months after calendar year for distributions.
  • Track your reimbursement and submit your receipts for it.

FSA Dependent Care – $5,000 for 2015

  • Works the same as FSA except distributions are used for child dependent care.
  • Also, no rollover or extension to next calendar year benefit like the Medical FSA

Check out this list for eligible expenses.

HSA – (Health Savings Account) $6,550 Family, $3,300 Self-only coverage limits for 2015

First – You must qualify for an HSA. Meaning you have a high deductible plan along with this you are not enrolled in Medicare.

Advantages

  • Contributions can be excluded from your taxable income. Money goes in pre-tax comes out tax-free with qualifying medical expense.
  • Any income earned on your savings will be tax-free as long as used for qualifying medical cost.
  • Catch up contributions of $1,000 allowed if over age 55.
  • Transferable at death.

Disadvantages

  • In order to get the deduction you must chose the deduction on your tax return.
  • Must have a high-deductible plan to use.

Although these tools don’t get much coverage in the press and aren’t widely known, be sure to use them to your advantage. Check the limits each year and figure out what contribution level makes sense for you.

With that said have you ever elected to use any of the plans above?

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax information contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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