The rules for HSA compatibility are not very arcane. My suggestion would be to go back to your insurance agent, switch to an HSA compatible plan, and set up an HSA. Then you pay your out of pocket costs from the HSA and they're all deductible.
R's, John
You have it backwards. If you set up an HSA, your contributions to the HSA are tax deductible above the line. Distributions are tax-free if used to pay for medical. There is no tax deduction for paying the medical with tax-free funds.
I concur in that I don't like the way Mr. Levine stated it.
The funds are deductible going IN to the HSA. When paying (or reimbursing) medical expenses, the money is not recognized at all for tax purposes. However, expenses covered by the HSA don't qualify for the normal itemized medical deduction. For reimbursment of a prior year expense, that may mean amending the prior year return if a deduction was taken and yielded a tax benefit. Reimbursement can occur only for expenses incurred on or after the first of the month in which the HSA was created (or for HSAs created before April 15, 2005, expenses on or after January 1, 2004).
There's a special rule for when HSAs can be used to pay health insurance premiums, but all other medical expenses, including transportation, qualify at all times.
Note that if anyone has clients that have not paid all their medical expenses with their HSA (i.e., they have medical expenses that were NOT paid from the HSA and not deducted on Schedule A), you should be TRACKING this - as when they die, the estate can still take a reimbursement distribution which will remain tax free (along with payment of medical expenses up to 1 year from the date of death), while the inherited portion will become income to any non-spouse beneficiary. Cf. Form 8889, Line 15.
And as a reminder, not all states conform to federal HSA treatment, for example in California an HSA account is just a regular investment account for purposes of state income tax -- no deduction for contributions, earnings are taxable, and withdrawals have no tax impact whatsoever.
-Mark Bole
Acutally you do get a California Adjustment to your schedule A to (possibly) deduct the medical expenses paid from an HSA.
"Health Savings Account (HSA) Distributions . If you received a tax-free HSA distribution for qualified medical expenses, enter the qualified expenses paid that exceed 7.5% of federal AGI as an adjustment to itemized deductions."
Steve
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