How HSAs Help Employees Realize Better 2020 Tax Breaks – InsuranceNewsNet

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June 16, 2020 Top Stories No comments
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How HSAs Help Employees Realize Better 2020 Tax Breaks

By Tom Torre

Achieving financial wellness can be difficult. We often believe that those with stronger personal finances are either “financially savvy” or have some secret knowledge that makes both saving and managing their finances easier. Secret knowledge aside, one thing is for certain: financially healthy people understand their tax breaks.

It’s rare for someone to say they enjoy tax season, especially considering the immense amount of time and specialized knowledge that goes into understanding every tax break, new piece of legislation, or regulation.

However, by focusing on the tax-advantaged accounts with the highest rewards, your clients can turn their least favorite season into “money-saving season” – both this year and in 2021. Even better, they still have time to realize better tax breaks this year because the tax filing deadline has been extended to July 15.

A health savings account is a tax-advantaged account that offers the highest rewards. HSAs are available to any taxpayer in the U.S. enrolled in a qualified high-deductible health plan. These accounts allow individuals to contribute and withdraw funds tax free, as long as they’re used to pay for qualified medical expenses. In addition, the money is not lost at the end of the year; funds can be rolled over and allowed to grow if they are not spent. In summation, HSAs are triple-tax-advantaged accounts.

HSAs offer significant tax breaks when used properly by individuals and employers. For example, the maximum contribution for a family in 2019 was $7,000. With a marginal tax rate of 30%, that family would save $2,100 on their taxes when they maximize their contributions. With savings like that, it’s hard to overstate the importance of leveraging an HSA this tax season.

Here are a few tips on how your clients can maximize their HSA tax breaks this year and best prepare for 2021.

  • Maximize your contribution. HSA participants who are in a financial situation to do so, should ensure they’ve maximized their contribution prior to filing their taxes. As mentioned, families can contribute up to $7,100, single individuals up to $3,100 and for those over 55 years old, up to $8,100. By maximizing their contribution, your client will naturally maximize their tax breaks. If you client is in a position where they won’t spend the full contribution within the year, the funds roll over and continue to grow tax free.
  • Track your health care expenses. If your client is not in a position to contribute the maximum amount, they must make sure they are tracking their yearly health care expenses so that they can at least contribute that amount to the account. By doing so, they will receive tax breaks on all of their qualified medical costs. Furthermore, if your client has a record of all health care expenses from the current and prior year that were not originally reimbursed through their HSA, they can pass those expenses through the HSA at the time of filing to get a current year tax benefit.

 

  • Plan for the future. Once your client’s taxes are complete for the prior year, there’s no better time to start looking ahead to next year. Now is a great time to determine what things they might want to do to put themselves in a better position and reduce their tax obligation come 2021 tax season. For those financially able, consulting a tax expert is the best way to ensure they are making tax season work for them.

 

As COVID-19 continues to create uncertainty for many employees, it’s important to understand how HSAs can help provide protection in the face of crisis situations. HSAs offer an ideal “nest egg” in the event an employee needs to withdraw money to handle unplanned medical expenses or health care costs – and allows them to do it without incurring any penalties. This saves them from additional tax penalties and preserves their future financial wellness, which may be extra important if employment or health status unexpectedly changes as a result of the pandemic.

Taking these steps will help employees to have a better tax season this year and next. However, the real takeaway is that individuals should treat their HSA as a long-term vehicle that helps reduce current tax obligations while growing savings tax free for future use. To further put this into perspective, a couple retiring today can expect to have more than $250,000 in out-of-pocket medical expenses over the span of their retirement. Properly leveraging HSAs is the best way to prepare for these future expenses while reducing current tax obligation.

Tom Torre is CEO of Bend Financial. Tom may be contacted at [email protected].  

© Entire contents copyright 2020 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

 

 

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