Updated Dec. 10, 2007 – If you’re self-employed, own a small business or work for one and are under insured with measly benefits, there is a way to put aside money for your medial expenses and save on your taxes.
A new provision in the Medicare law makes it possible for you to put aside pre-tax money into a Health Savings Account. This is particularly helpful if you pay for your own health care. But there are a few drawbacks.
The good news:
- Like contributions to your IRA, what you put in you can deduct from your taxes.
- There are no income restrictions.
- You get the federal tax savings whether you itemize or not.
- If you change jobs you can take it with you.
- Eventually you can lower your premiums because money in your HSA can cover your deductible expenses, medical expenses you’d normally pay out of pocket.
- You are allowed to carry an HSA balance over from year to year, and any income earned is tax free. This bodes well for health people with only minor expenses because it will allow you to build a medical disaster fund.
- It’s not too late to set up an HSA this year. You can contribute to your account for this year any time between now and April 15, 2006.
- You must have health insurance with a minimum $1,000 deductible for single coverage or $2,000 for family coverage. If you work for a big company with generous coverage you won’t qualify.
- If you have self-only coverage, your insurance cannot require that you pay more than $5,000 in out of pocket expenses (including the deductible) or you won’t be eligible for an HSA.
- The most you can contribute this year is your deductible or $2,600, whichever is lower. Next year it will be adjusted for inflation.
- You cannot use money from the account to pay an insurance premium.
- Using the money for anything other than medical expenses will trigger a 15 percent penalty.
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