As we approach the end of the 2021 tax year, it’s a great time to take stock of your finances and make sure you are taking advantage of all of the available ways to save your tax dollars.
One great, but often overlooked, way to reduce your tax bill is to ensure that you are maximizing your use of a Health Savings Account (HSA) .
Most taxpayers with High Deductible Health Plans (HDHP) - any plan with an individual deductible of $1,400+ or a family deductible of $2,800+ - qualify to take advantage of an HSA. An HSA is a special savings account that you open to save for your medical expenses. In 2021, individuals can contribute up to $3,600, or $7,200 for couples. All of these contributions are directly deducted from your income, potentially lowering your tax bill by thousands of dollars per year, just by putting your own money into a qualified savings account for medical needs. Note that in 2022 these limits will increase to $3,650 and $7,300 for individuals and couples respectively.
These funds can be used for qualifying health care expenses, as a savings account for future health expenditures, or be invested and grow tax free similar to a 401(K) or IRA. Eligible reimbursable expenses can include obvious things like doctor’s visits and prescription drugs, but also include less obvious expenses such as paying for vitamins and supplements recommended by your doctor. Notably, the rules changed with the passage of last year’s CARES Act to make non-prescription OTC drugs and menstrual care/feminine hygiene products reimbursable. Many clients’ plans do not cover mental health, so your HSA can also be a good way to defray the cost if you happened to see a therapist this year.
We encourage you to fund your HSA before the end of the year and reimburse yourself (by check, ATM, or online transfer, depending on your insurance provider’s setup) for any eligible expenses. HSA rules generally apply to calendar years rather than to the date the plan was established, so now is the time to fund it and make sure you’ve reimbursed yourself for any of 2021’s eligible healthcare expenses, and to remind any employees whose plans may include an HSA to do the same.
If you’re reading this and realizing you’ve dropped the ball on utilizing your HSA in previous years, note that you can reimburse yourself at any time for past expenses, so long as they were incurred after your HSA was opened. It literally pays to be thorough, so ask your managing Harmony team member if you think you might need help fully utilizing your HSA.
TL;DR: Fund or form your HSA now and take the time to use it or to reimburse yourself for medical expenses prior to 12/31. Maximizing your HSA usage is an easy way to save thousands on your tax bill each year. Keep an eye on our newsletter and on the CPA Eats Blog for more useful year end tips and strategies as we move into tax season.