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Health savings accounts can cut your taxes as they pay bills in high-deductible plans

Francisco and Lauren Nieves-Taranto, center, with their children, from left, Sebastien, 13, Javier, 6, Gabriel, 10, Nicolas 4-months, and Valentina, 8, in February at their home in Windermere, Fla. Nieves-Taranto covered the entire $8,000 bill from the birth of Nicolas last year with his account balance from a health savings account, or HSA.
Francisco and Lauren Nieves-Taranto, center, with their children, from left, Sebastien, 13, Javier, 6, Gabriel, 10, Nicolas 4-months, and Valentina, 8, in February at their home in Windermere, Fla. Nieves-Taranto covered the entire $8,000 bill from the birth of Nicolas last year with his account balance from a health savings account, or HSA. AP

HSince the election in November, there has been a lot of discussion about modifying the Affordable Care Act and expanding health savings accounts. What does that mean to you?

An HSA has the potential to reduce federal income taxes. Contributions are deducted against income and may reduce the amount of tax you owe. Qualified withdrawals are tax-free for health-related expenses. You may use the money in your account as payment for medical expenses (paid with an HSA-specific credit or debit card) or as an investment account to be used during retirement.

You might be eligible. You may contribute to an HSA if you enrolled in an HSA-qualified health plan, are not covered by any other health plan, and cannot be claimed as a dependent on another person’s tax return. People on Medicare may not participate.

HSAs work best with high-deductible health plans. HSA-qualified health plans require a minimum deductible of $1,300 for single coverage, with maximum out-of-pocket expenses of $6,550. For families, the minimum deductible is $2,600 with maximum out-of-pocket expenses of $13,100. Your HSA account must be paired with a high-deductible plan that meets these requirements.

You can contribute a significant amount. HSA accounts are unique in that you own the account, contributions may exceed your earned income, you may contribute on another’s behalf, and balances may carry over to the following year.

Maximum contribution limits for 2017 are $3,400 for an individual and $6,750 for families. An additional catch-up contribution of $1,000 is allowed for people 55 and older. Employers may also use HSA accounts as part of a benefits package for employees. Contributions are due by the tax-filing deadline, and your CPA should file a Form 8889 with your tax return.

Know the details. Earnings on the money within the HSA are tax-deferred, and qualified distributions for qualified medical expenses are tax-free. Nonqualified distributions are subject to income tax and a penalty, with exceptions for death, disability and people older than 65.

Next month we’ll explore HSA accounts as an investment opportunity that could supplement your income during retirement.

Mark Daly is managing director and investment officer of Daly & Vachek Investment Consulting Group of Wells Fargo Advisors. dvicg.com; 333-1433.This column appears in the March 15-April 18, 2017, edition of the Idaho Statesman’s Business Insider magazine as part of a special section on the business of health.

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