Reduce Taxes with Health Savings Accounts

A Health Savings Account (HSA) is a tax-favored medical savings account established with a sponsoring financial institution.  Tax deductible contributions may be made and the account balance and earnings can be used to pay current and future qualified medical expenses tax-free.  The maximum deductible contribution is $3,000 in 2009 ($3,050 in 2010) for self coverage and $5,950 in 2009 ($6,150 in 2010) for a family health plan.  An additional $1,000 "catch-up" contribution may be made by those age 55 and older.  The contribution for a tax year may be made by the original (unextended) tax return due date of April 15th.  The deduction is "above-the-line" and reduces adjusted gross income (AGI).  Furthermore, the deduction is not "phased out" based upon levels of income.  Unlike flexible spending medical accounts under so-called cafeteria plans, the unused amounts in an HSA are not forfeited and ideally can be saved for retirement medical expenses.  Amounts withdrawn before age 65 to pay for non-medical expenses are subject to income tax plus a 10% penalty.  Under current health insurance reform proposals, this penalty would double to 20% after 2010.  To be eligible for an HSA, you must have a "high deductible health insurance plan," not be enrolled in Medicare, not be claimed as a dependent, and not be covered by a disqualifying health insurance plan.