Health savings account tax benefits can be significant. These accounts make it possible for people to accrue money to fund medical expenses without paying income taxes on the money first. This means a taxpayer's adjusted gross income may be reduced, which may translate into a lower adjusted gross income overall. The lowered income may mean a taxpayer has to pay less for income taxes. This type of account may also help a taxpayer meet eligibility requirements for a range of tax deductions and credits. Additionally, taxpayers can usually withdraw the money they’ve saved for medical needs tax free.
When considering health savings account tax advantages, the reduction of taxable income may be the first thing that comes to mind. When a person has a health savings account, he can deposit money into it — up to a certain limit — for each tax year. He can then use this money to pay for health expenses as needed. Regardless of whether he uses the money in the account or not, depositing the money lowers his taxable income; this may result in less tax liability for the taxpayer. In most cases, the taxpayer can reduce his taxable income by the entire amount, up to the maximum, that he deposits each year.
Depending on the taxpayer's income level, there may be many tax breaks among the health savings account tax advantages. When a person places enough money in a health savings account to significantly reduce his adjusted gross income, he may qualify for tax deductions and credits that were previously unavailable. For example, he may qualify for an earned income credit or a child tax credit because of the reduction in income. A person who would have qualified for a tax break without the health savings account may simply qualify for more of a tax break with it.
Another health savings account tax benefit involves the use of the money deposited into the account. With this type of account, the money isn’t only tax free while it is held in the account. It remains tax free even when the account holder withdraws and uses it. The taxpayer does have to use it for eligible medical expenses, however, such as medical, dental, vision, and certain types of alternative medical care. The money in this account can even be used to pay for long-term care or household medical supplies. If a person withdraws the money and uses it for non-medical expenses, however, he can expect to owe taxes on it.