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Home / Services / Calculators / Newsletter / Archives Health Savings Accounts On December 8, 2003 President Bush signed the Medicare Prescription Drug and Modernization Act of 2003. Most of this 200-page law pertains to Medicare and prescription drugs and does not go into effect until 2006. The last 10 pages however, go into effect on January 1, 2004 and allow taxpayers to establish Health Savings Accounts. Taxpayers may contribute up to $2,600 for self-only accounts and up to $5,150 for family accounts. The contribution is 1/2 of the annual deductible of the insurance plan with a minimum allowable contribution of $1,000 for self-only plans and $2,000 for family plans. Taxpayers who are at least 55 may contribute an extra $500 in 2004, $600 in 2005, $700 in 2006, $800 in 2007, $900 in 2008, and $1,000 in 2009 and thereafter. The IRS has not yet decided if uninsured taxpayers may contribute to these Health Savings Accounts. These Health Savings Accounts are one of the most significant tax changes in the last few years. To be eligible for the full deduction, taxpayers must have adjusted gross income of $150,000 or less for joint returns and $75,000 or less for separate returns. In addition, taxpayers must either have no health insurance or health insurance with at least a $500 deductible for self-only coverage and at least a $1,000 deductible for family coverage. A partial deduction is allowed for taxpayers filing jointly with adjusted gross income up to $170,000 and taxpayers filing separately with adjusted gross income up to $85,000. No deduction is allowed for incomes over these amounts. The contributions to these accounts are deductible on the front of your return even if you do not itemize. Because of how they are deducted, they will reduce your Ohio income tax also. These contributions are deducted in the year they are made, not when they are spent for medical expenses. The income that these accounts earn is tax-free. The amounts spent on qualified medical expenses are not taxable. Amounts taken out of these accounts that are not for qualified medical expenses are subject to tax and a 15% penalty. Contributions to these accounts lower adjusted gross income. This may allow taxpayers who's adjusted gross income was just a little too high to qualify for a regular IRA, a Roth IRA, a HOPE Scholarship credit, a Lifetime Learning Credit, a deduction for Student Loan Interest, and a deduction for the Tuition and Fees Deduction. These contributions reduce and may even eliminate the taxpayer's exposure to the AMT tax. Medical Expenses have been allowed as and itemized deduction. However, these amounts are reduced by 7-1/2% of the taxpayer's adjusted gross income. Using these accounts make these expenses fully deductible. In fact, by using these accounts, taxpayers filing a joint return and both at leas 55 years old, could possibly use a standard deduction that is $5,000 higher than their itemized deductions are after using these accounts to pay their medical bills. There is a provision for employer paid plans. These amounts are deductible by the employer and not taxable to the employee. These rules are brand new. Be sure to discuss your situation with our office before you make any contributions.
(January, 2004 Newsletter)
James E. Newland, CPA 939 Center Road Eastlake, Ohio 44095 440-951-9799 |
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