Commonsense CPA: Explaining Your HSA

As we approach the end of the year, it's a great time to make sure you're optimizing your tax situation by maximizing all of your annual tax write-offs. This means a lot of the 'normal' stuff like maxing out your annual retirement contributions, funding 529 plans, donating to charity… and pulling all of your records together in a neat and organized fashion for your friendly tax CPAs! It also includes the opportunity to max out one of my personal favorite tax write-offs: funding your HSA account.

This month's Commonsense CPA focuses on the tax unicorn that is the HSA: there are no income limits to using an HSA. The only real qualification is that you have to be on a High Deductible Health Care Plan (HDHP) and not subject to coverage under other plans (like Medicare, VA, etc). Given the more than 200% increase in health insurance premiums since 2013, many of us are now on high deductible plans, or at least have the option to select to be on one, and this makes the HSA a beautiful option to reduce your taxes and lower your out of pocket health care costs.

Matt Hetrick, CPA

President & Founder of Harmony Group

Explaining Your HSA

An HSA is a special tax-advantaged savings account specifically for medical and health-related expenses. Most taxpayers with an HDHP - any plan with an individual deductible of $1,500 or higher, or a family deductible of $3,000 or higher - will qualify to take advantage of an HSA. In 2022, individuals can contribute up to $3,650, or $7,200 for couples. If you’re 55+, you can add an extra $1,000 to the contribution limits, and figures are all set to rise again in 2023. 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.

A big reason HSAs are so powerful is that they are triple tax advantaged - the amount of your contribution is tax deferred until withdrawal, withdrawals used for medical expenses are never taxed, AND any investment gains are never taxed so long as they are also used for qualified healthcare expenses. This makes an HSA an incredibly powerful tool which can be used for medical expenses, as a savings account for future medical expenditures, or to invest and grow tax free similar to a 401(K) or IRA.

What Expenses Qualify?

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, and the rules were recently updated 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. Find a more thorough list here, as qualifying expenses aren’t always obvious.

Sounds Good to Me…

Us too! Though the actual contribution deadline for 2022 is April 15, 2024, year’s end is a great moment to take stock of savings and expenses - 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. One thing to note is that qualifying medical expenses never expire, meaning you can reimburse yourself at any time for past expenses, so long as they were incurred after your HSA was opened.

What If I Haven’t Established an HSA?

• If you’re looking for near-term use of HSA funds, you can set up an account with someone like Optum Financial or WEX Health, Inc.

• If you’re looking toward future health expense needs, you may want to consider the impact of investing those contributions for potential tax-free growth. Our friends at Harmony Wealth Advisors are available to walk you through some of your options.

Most of our clients will have HDHPs, and may even be overlooking the fact that they already have an HSA. Just ask your managing Harmony team member if you think you might need help fully utilizing or establishing your HSA.

TL;DR: Fund or form your HSA now and take the time to use it or to reimburse yourself for medical expenses. 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 Commonsense CPA Blog for more useful year end tips and strategies as we move into tax season.

Journal Entries

Congress Shining a Light on Under-the-Table Side Hustles

The American Rescue Plan lowered the threshold requiring Third Party Payment Networks to issue a 1099-K to users receiving payments on the networks to $600, dramatically lower then the previous $20,000 threshold. These networks (Square, Venmo, Amazon, Paypal) will be now issuing exponentially more 1099-ks to users and the IRS – making discrepancies in tax payments much more visible for people using the networks for “side hustles” providing goods or services. A major complexity is discerning taxable payments for services from non-taxable personal transactions but if you have a “business” account on these platforms, or are charging for goods and services, assume that those payments are being reported to the IRS. The obligation to report all taxable income to the IRS remains unchanged but if you’ve been delinquent on those obligations contact your Harmony advisor to best remedy the situation.

Scam Bankman Fleed

The collapse of crypto currency exchange FTX and it’s ubiquitous frontman Sam Bankman-Fried is fascinating to the media and has been called the “Lehman moment” for cryptocurrency – a reference to the collapse of investment bank Lehman Brothers as the first domino to fall and cause investors real pain in the 2008 Financial Crisis. The details of the collapse have been offered as devilishly complex but one thing is clear – FTX had no meaningful accounting systems. Many real journalistic outlets are covering the intricacies of crypto yield farming and margin lending (and rampant fraud) but here at Commonsense CPA we don’t want to miss an opportunity to remind our readers that having good accounting controls and keeping accurate financial records is essential for any business.

Time to Wake Up Your Cash

The sequel to the epochal film Wall Street (“greed is good”) was called Wall Street: Money Never Sleeps, a (partial) reference to the truism that investments constantly gain and lose money. While the sequel is missable, the tagline is worth considering now even more than when the film originally premiered. When Wall Street: Money Never Sleeps premiered in May 2010 the 6-Month Treasury Bill yield was 22 bps (.22%). The current 6-month Treasury Bill yield is 472 bps (4.72%). We don’t give out investment advice here but the major take-away for our clients is that we are currently in the highest interest rate environment since 2008 when the Fed slashed interest rates. This makes borrowing more expensive but also makes it imperative that you examine the interest rates paid on your current deposit accounts as you re-evaluate your corporate treasury management strategies in consultation with your financial advisor.