It’s tax season again, and time is quickly running out to find every deduction and credit coming to you, but there’s one deduction that your tax person might not talk about as much as he or she should: health savings accounts (HSAs).

What’s a Health Savings Account?

An HSA is an account that the Internal Revenue Service (IRS) allows you to create solely to cover medical expenses. Think of it as a dedicated savings account. But unlike with a savings account, you get a triple – yes, triple – tax advantage. First, you fund it with pretax money, meaning that the funds you put in it don’t show up as income on your W-2; it’s as if that income never existed. This means that you don’t pay income tax before making the contribution.

Second, the money can grow tax free in the account. HSAs are portable, which means that you keep the account even if you switch employers. It’s yours forever, and the money can grow as long as it’s not spent (unlike with a flexible spending account, or FSA.) Also, your contributions to an HSA are invested; they don’t sit around earning savings-account rates. (For more, see Comparing Health Savings Accounts and Flexible Savings Accounts.)

Finally, as long as you use the account for qualified medical expenses for you or your spouse, you won’t pay taxes on the money you withdraw. That’s an even better deal than retirement plans. 

There are a few rules, though. You must be enrolled in a high-deductible insurance plan of at least $1,300 for individuals and $2,600 for families. You also can’t be enrolled in Medicare, have other health coverage (other than a few exceptions the IRS lays out) or be claimed as a dependent on someone else’s tax return. If you meet the criteria, you can create an account and deposit up to $3,400 as an individual ($3,350 for 2016) and $6,750 as a family. These maximums include any employer contribution. You can also make an extra $1,000 catch-up contribution annually once you turn 55.-

Make It a Tax Strategy

It seems weird that you can still make contributions in 2017 that affect your 2016 taxes, but if the IRS lets you, why look a gift horse in the mouth? If you want to lower your tax bill and have some spare cash available – and you meet the requirements – you must open an HSA before April 18. The money you contribute reduces your adjusted gross income, which could have a dramatic effect on your tax bill, especially if you’re barely into the next highest tax bracket.

Also, HSAs qualify for the IRS’s last-month rule. This means that as long as you were eligible on Dec. 1, 2016, you’re eligible for the entire year. It doesn’t matter if you switched health plans mid-year and only became qualified in, say, October. 

The Bottom Line

Not everybody qualifies, and not everybody has the extra money to contribute to an HSA. However, if you’re looking for a way to lower your taxable income and set up a cushion for your out-of-pocket medical expenses, an HSA will do the job. Also, the HSA is taking a more prominent role in the proposed Republican-led healthcare plan with savings levels possibly rising to at least $6,550 for an individual and $13,100 for a family, beginning in 2018. (For more, see 7 Tips to Having the Best Health Savings Account (HSA).

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