HSA and med deductions

Not per se. But payments made from the HSA are not included in the medical expenses you can deduct from your income for tax purposes.

It feels odd because it's not legal, and for more than one reason. First, you are not normally allowed a deduction for a payment made with tax-free money.

And you are not normally allowed a double deduction for anything - and what you are talking about would in effect be a double deduction.

___ Stu

Thanks. That makes more sense.

G

On the other hand, you can only deduct medical expenses if they exceed a fairly high threshold, but you can always deduct your HSA contribution.

There are two ways to use an HSA:

One is to treat it as a pass-through to pay your out of pocket medical expenses with pre-tax money. For this, you can get an HSA account that works like a checking account, with checks and a debit card.

The other is to treat it as a retirement account, with the option to use it to pay medical expenses if you're hit by a bus. For this, you can get a mutual fund account HSA, with a range of funds you can put your money in, and withdrawals via requests to send you a check. (You are allowed to reimburse yourself for medical expenses you paid directly.)

They're not mutually exclusive, e.g., pay your expenses and at the end of the year sweep what's left into a mutual fund, but that usually requires two HSAs.

R's, John

Medical items paid directly from an HSA-account or reimbursed later are NOT deductible as medical expenses.

A couple of things to remember about HSAs:

1) One may reimburse after the fact. One cannot reimburse for an amount actually deducted as a medical expense in a closed year, but in years where the medical expenses did not exceed the 7.5% (or 10%) AGI floor, reimbursement may happen at any future date as long as the expense was originally incurred after the account was opened (or at any time in 2004 up to April 15, 2005 if opened at any time in that period). [The IRS has said in its Revenue Procedures for HSAs that one can't reimburse an actually deducted medical expense in an open year too. I find that advice incorrect. One can always amend the return for an open year to remove the deduction and make it reimbursable.]

2) One should be tracking ALL medical expenses not deducted which are HSA-reimbursable which have not been actually reimbursed for as long as the account has been open. This is important because if one dies before that amount is reimbursed, the executor could direct reimbursement on the decedent's final income tax return so as to avoid an income taxable distribution to a successor beneficiary.

A good point. But that would add the funds to the estate (possible estate tax) rather than passing to the beneficiaries of the HSA (possible lower tax rate). Is this correct?

No, that's not correct. The estate tax results will be the same in any case. The issue is whether the money will also be subject to income tax or not.

___ Stu

well, this is good to know. I found the following:

The account will become taxable to the recipient of it (including the estate of the individual)

• Taxable amount will be reduced by any qualified medical expenses incurred by the deceased individual before death and paid by the recipient of the HSA

*The taxable amount will also be reduced by the amount of estate tax paid due to inclusion of the HSA into the deceased individual's estate

Since you do not avoid estate tax, and the HSA is taxable as income to the recipient, it makes no sense not to reimburse medical expenses in order to build up the HSA account value (none of my medical expenses would pass the x% floor). Is this correct? If so, I will reimburse myself for all accrued medical expenses.

Thanks.

If your only goal is to minimize taxes, sure. If you have other goals such as maintaining a cash cushion for future medical and other expenses, it makes sense to leave money in the account.

I treat mine mostly as an IRA, another place to stash retirement money.

R's, John

Safe to say, it would be treated similar to an (pretax) IRA tax-wise. Taxed on withdrawal.

A good point. But that would add the funds to the estate (possible estate tax) rather than passing to the beneficiaries of the HSA (possible lower tax rate). Is this correct? =============For estate tax purposes, there is no change. Whether it's cash, in a regular bank account, or in an HSA-account, it's still an asset included in gross estate. Health Savings Accounts are not pensions or annuities excludible under IRC 2039(e).