Under-utilized Tax Saving Tools
There are two common yet under- utilized tax saving tools that many people do not consider or are not aware of; they are Health Savings Accounts (HSA) and Traditional IRAs.
If you have a high deductible health plan (HDHP), and you haven’t already established an HSA at a financial institution, you are missing a great tax savings opportunity! You can contribute, as pre-tax dollars, up to $6450 for 2013 and $6550 for 2014, and if you are 55 or older you can contribute an additional $1000. This money is pre-tax, which means you do not pay income tax on your contributions. If you are in the 25% tax bracket, that is up to $1887.50 in tax savings!
As an example, if you spent $5000 on qualified medical expenses in 2013, without contributing to, or using your existing HSA, you have until April 15, 2014 to make a 2013 contribution. By simply depositing $5000 into your HSA, and then turning around and writing yourself a check to reimburse yourself for the medical expenses paid out of pocket, you instantly save $1250 on your Income Tax Return (assuming a 25% tax rate). This deduction is on the front page of the Federal Income Tax Form 1040, so you do not need to itemize, nor do you need to overcome the 10% of income deduction for medical expenses for 2013. Even if you did not have any qualified medical expenses, you can still make a contribution to receive the tax deduction and use the money for future medical expenses. If your HSA account is serviced through your employer, your pre-tax contributions can also save you from paying Social Security and Medicare taxes on your HSA contributions.
A frequent question is: What is considered a qualified medical expense to be paid using my HSA?
The answer is anything medical or dental related that diagnoses, cures, mitigates, treats, or prevents disease and the cost for treatments. You can also use your HSA to pay for after-tax insurance premiums that covers these medical expenses, as well as certain long-term care premiums.
Traditional IRAs are another great tax savings tool. You can contribute up to $5500 for 2013, $6500 if you are age 50 or older. Again, if you are in the 25% tax bracket, this adds up to as much as a $1625 tax savings, an instant dividend paid on your investment. There are income limitations for IRAs, and you should consult your financial planner to make sure this is the right investment towards your investing goals. As with the HSA you have until April 15, 2014 to make a 2013 contribution.
Stephen Updegraff, EA
UAI Accounting and Tax Services
(937) 483-5154
www.UAITax.com
An enrolled agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
Speak Your Mind