Nobody enjoys doctor visits, but with today’s high insurance deductibles and the enormous cost of other uncovered healthcare, the expenses may make you cringe more than the actual visit.
Did you know Uncle Sam has your back?
That’s right. There are a couple of tax advantages you can use to lower the overall cost of your medical care. These advantages can help you pay your portion of insurance premiums, copays and other uncovered medical bills and expenses—even transportation. However, they require planning and some specialized tax knowledge.
The two main options are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). Both let you allocate pre-tax dollars to pay for anticipated medical expenses:
Flexible Spending Accounts
When you establish an FSA, you set aside money from your salary before it is taxed, through a salary deferral. You save on taxes because you have lowered your taxable salary through this deferment. The deferred money in your FSA may be used to pay for qualified medical expenses, such as copays and deductibles. You can also use it for specified over-the-counter medication and transportation, if it meets the “qualified” criteria.
You establish a FSA during your employer’s open enrollment period when you determine the amount you want deferred and it will be deducted directly from your paycheck before taxes. There are a variety of ways to receive reimbursement for your actual medical expenses, depending on your specific plan. These are usually “use-it-or-lose-it” accounts, which means if you don’t use the funds in the year, you don’t get to roll over into the next year, so you should budget what you know you will be spending.
FSAs do have some restrictions, so check the specifics of your plan before you set your deduction.
Health Savings Accounts
HSAs are structured differently from FSAs, which may work better depending on your personal circumstances. You can think of a HSA more like a medical-specific trust. Funds allocated to HSAs can be invested and the subsequent growth is tax free, as well. More importantly, particularly for those who have unpredictable health costs, you cannot lose the unused funds in a HSA. Any remaining balance is carried forward, even into retirement. (After age 65, if you take the funds out, you will pay ordinary income tax on any funds not used for covered medical costs.)
You also own the account so the balance follows you if you change jobs or move to another state. Just like FSAs, you contribute to your HSA using pre-tax dollars, so the discounts you receive on your medical expenses work the same way—you save based on your tax bracket.
HSAs are usually for those who participate in a high deductible plan. Most employers will offer one, but make sure it makes sense for you and your family to select the high deductible plan to meet this requirement.
Learn more about taxes and how they fit into your holistic financial life by reading our free Personal Capital Tax Guide for Holistic Financial Planning.
This blog is for informational purposes only and is intended to offer guidance; not specific legal or tax advice. Clients are advised to consult their personal estate attorney and CPA before taking action based on this advice.
Amin Dabit, CFP®
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