In
December, 2003, President Bush signed into law the Medicare Prescription Drug
Modernization Act of 2003. This Act ushered in the new health savings account
(HSA) effective beginning in 2004. Contributions to the HSA are fully
deductible whether or not you itemize deductions, and distributions for
qualifying medical expenses are tax free. In other words, an HSA permits
medical expenses (including non prescription drugs) to be deducted directly
from your adjusted gross income whether or not you itemize and avoids the rule
that only medical expenses in excess of 72
% of adjusted gross income are deductible. To qualify for an HSA, you must be
covered by a qualifying Ahigh
deductible health plan@
(HDHP). If you have self only
coverage, your HDHP must have a minimum annual deductible of $1,000, and your
maximum out-of-pocket exposure cannot exceed $5,000.
If you have family coverage,
your minimum annual deductible is $2,000, and your maximum out-of-pocket
exposure cannot exceed $10,000. Tax Tip! Generally,
you cannot receive a tax-free medical expense reimbursement from an HSA for
any medical expense incurred before you established the HSA.
However, the IRS has waived this rule for 2004 only. Consequently, let=s
assume that for every day in 2004 you are covered by a qualified medical plan
with a $5,000 deductible. The 2004 medical expenses for you and your family
are more than $5,000. For 2004, you could 1) establish an HSA by April
15, 2005, 2) contribute $5,000 into it by April 15, 2005, 3)
take a $5,000 above-the-line deduction on your 2004 return, and 4)
reimburse yourself for $5,000 of your 2004 medical expenses out of the HSA tax
free. In effect, this would convert your $5,000 of medical expenses from an
itemized deduction (allowed only to the extent of the excess of the medical
expenses over 7.5% of your adjusted gross income) to an above-the-line
deduction for the full $5,000 amount.
If
you need any further information on HSAs, please contact our office and we
will be glad to assist you.