Health savings accounts can be a useful tax savings tool. They were first created around 10 or 12 years ago. Essentially they allow individuals to set money aside to pay for doctor co-pays, prescriptions, dental visits, eyeglasses, and other medical expenses tax-free. In order to qualify, you must have health insurance that qualifies as “high deductible”. This means that your health plan’s deductible must be at least a certain amount (currently $1300 for an individual or $2600 for a family), and your out-of-pocket limit must be no more than a certain amount (currently $6450 for an individual or $12,900 for a family).
Once you qualify, it’s relatively easy to set up the account itself, and many banks offer them. And once it’s created, you can contribute up to a certain amount each year (currently $3350 for an individual or $6650 for family), and then take a deduction for those contributions on your personal tax return (similar to the way you can take a deduction for IRA contributions). And when you use that money to pay for qualified medical expenses, you don’t have to pay any tax on it.
Note that as with many tax advantaged plans, there are taxes/penalties for taking distributions for nonqualified expenses, so it’s best not to contribute cash that you might need in the near future.
Do you have the support you need to manage your small business bookkeeping?
Schedule a 30-minute appointment to speak with a local small business adviser.