Money and More© February 9, 2019

Save taxes on medical expenses and use the standard deduction

Thanks to the tax law changes, many taxpayers must now take the Standard Deduction on their federal income tax returns.   Additionally, the threshold for medical expenses jumped from 7.5% of Adjusted Gross Income to 10% in 2019.  There are strategies that can help save taxes in the short term or long term.

Current Tax Savings

First, any health care premiums paid through your wages are pre-tax.  That means that they reduce your income for tax purposes.   If you have several options for health care plans and one is more expensive but has less out of pocket expenses, it might save you money depending upon how much health care you need from year to year.  If a plan reduces your co-pays you might save if you have reoccurring health care for chronic conditions.   This can help you save taxes in the short-term by paying higher premiums with pre-tax dollars.

Long Term Tax Savings

If you have disposable income, the High Deductible Health Plan (HDHP) might save taxes in the long run.  Let’s say you have few reoccurring medical expenses and enough disposable income.   First, you be able to purchase the health insurance for lower initial cost.  This kind of coverage allows an individual to fund a Health Savings Account (HSA) pre-tax for future medical expenses.  HSA funds can pay for current year or future year medical expenses tax-free.

For single person in 2019, this means their health insurance must have at least a $1350 deductible and maximum out of pocket expenses (other than premiums) of $6750.   This single taxpayer can contribute up to $3500 to their HSA plus $1000 more if they are over 55 years old.  A family can contribute up to $7000 in the HSA plus $1000 for the owner over 55.  The max out of pocket rises to $13,500 and the minimum plan deductible to $2700.

Coordinating the max HSA contribution with the HDHP can leave a big gap of coverage in a year with significant expenses.  This gap can be $5400 for an individual and $10,800 for a family.   This gap includes funneling the HSA contributions for current medical expenses on a tax-free basis.  These gaps are $1000 smaller if age 55 or older contribution is made.  This can be quite expense if the HDHP participants do not have sufficient emergency funds.  So, in a bad medical year an pan participant needs the money to cover the premiums, HSA contributions and out of pocket expenses.  For most taxpayers not every year is catastrophic like this example.

In a good year with relatively few medical expenses, the HSA contributions can be left untouched to grow tax free for future years.  While covering the out of pocket expenses from normal income.   This is distinct advantage as several good years in row can result in enough medical savings to cover a future bad year.  When the bad year occurs later in life, tax-free money is available pay the medical expenses.

One must do strategy

An additional tax strategy can augment both strategies with current tax savings.  Plans called Flexible Spending Accounts (FSAs) permit a pre-tax contribution through payroll deduction up to $2700 in 2019.   Usually, FSAs provide a debit card to be used at pharmacies and providers for out of pocket expenses.    These plans are a use or loss proposition though some plans permit a rollover of up to $500 each year or an extension to spend previous year amounts 2.5 months after plan year end-think March 15th for most plans.  The key with the FSAs is that the money can be used for the higher HDHP or regular coverage out of pocket expenses.

These strategies can help save extra tax dollars this year or in the future

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