How to figure tax savings on an HSA?
October 20, 2011 7:40 AM   Subscribe

Health Savings Account -- How do I figure the tax savings on an HSA that deducts $300 a month from my pay; yearly total = $3600? The representative selling this plan says the tax savings will be about 30%. That's fantastic if true, but it seems high. What do you think?
posted by partner to Work & Money (12 answers total)
 
Last year, what was your effective (income) tax rate? That's how much you will save, assuming you actually spend all $3600 for the year. All these things do is let you pay for your healthcare with pre-tax dollars. If your effective tax rate is 30%, then that's what you'll save because now you won't be taxed on these $3600.
posted by Brian Puccio at 7:46 AM on October 20, 2011 [1 favorite]


You're just reducing your taxable income by $3600, and receiving that $3600 tax-free with the stipulation that you can only use it for health expenses. How much you save on your total tax bill depends on what percentage of your income 3600 is, and on whether you're able to use it all.
posted by supercres at 7:52 AM on October 20, 2011


Well, you'd need to know your marginal tax rate. For singles earning between ~34k and ~83k it is 25% (married couples are between ~69k and ~140k). Look up other ranges yourself. Then you need to add in your state tax burden -- they range from 0% to 11% depending on your state. 5% is probably a fairly reasonable average which would put most people in position to save 30% total. Here's a chart for that

You should also keep in mind that anything you do not spend is LOST, so be careful to only apply an amount you can be sure to spend in 2012.
posted by Lame_username at 7:57 AM on October 20, 2011


You're not interested in your effective income tax rate, but your marginal rate: the taxes you pay on your next (or last) dollar earned. If you're paying taxes on your last dollar earned at, say, the 25% marginal rate, then moving $1 of your income to the tax-free category saves you $0.25 on your tax bill. So his 30% estimate is likely him just taking the relatively common 25% and 28% federal tax rates and adding in a fudge factor for state taxes (which are usually computed based the numbers on your federal tax form).
posted by introp at 7:57 AM on October 20, 2011


Lame_username: HSA funds are not lost at year's end like Flexible Savings Accounts. For FSAs it's "spend it or lose it." For HSAs it's "spend it or what you don't rolls over and you can use it next year." You can never get that money out for non-medical expenses, however, without paying a steep tax penalty.
posted by introp at 7:59 AM on October 20, 2011 [2 favorites]


We have the option of one of those at my job. My understanding is that you lose whatever money you haven't spent by the end of the year. It does not get returned to you as taxable income, so, presumably, whether you spend it or not, it will not be taxed.
posted by mareli at 7:59 AM on October 20, 2011


Supercres, you don't have to use all the money in an HSA in one year - that's an flexible spending account. They are different things.

One of the big advantages of the HSA is you can leave your money there to grow, tax free. And you can use it, tax free, on health expenses. So if you make a lot of money now (such that the tax savings isn't huge), the money can sit there while you use other money to pay your medical expenses, and then when you are old and grey, you can use the money to buy health insurance/pay for long term care/whatever you need. And after you're 65, you can withdraw it and pay your tax rate at that time on the money, instead of your rate now, assuming that you'll pay a lower rate in the future (maybe a bad assumption, maybe not). You can also get it out for non-medical reasons, subject to taxes and a 20% penalty, although you don't have to pay that penalty if you're over 65. So, while those aren't necessarily things that figure out your immediate tax impact, you might want to consider them!
posted by dpx.mfx at 7:59 AM on October 20, 2011


Health Savings Account (must have a high deductible health insurance plan; don't have to use all the money in it every year)

Flexible Spending Account (don't have to have health insurance; must use the money every year or lose it)

They are different things. If you really mean HSA, what people are saying about losing the money is wrong.
posted by dpx.mfx at 8:01 AM on October 20, 2011


Response by poster: Thanks for all the good info. As it turns out, we have an FSA and that's fine for our needs. But, we want to figure as best we can the amount we'll need this year for medical so we don't lose any of it. I've studied the charts from lame_username's links and it looks like the rep is in the ballpark as far as the tax savings go just as introp said.
posted by partner at 8:10 AM on October 20, 2011


As it turns out, we have an FSA and that's fine for our needs.

I'm confused, so are you not considering an HSA at all? As dpx.mfx mentioned, HSAs are only an option with a high deductible plan, and really the high deductible plan part is much more important than how the HSA works in my opinion. When you use a high deductible plan you are basically betting that you would be better off paying for your normal expected medical expenses yourself (saving on premiums) and that you would only need health insurance for big unexpected expenses that would be higher than your larger deductible. The HSA is a nice benefit you get for going with that kind of health insurance plan.
posted by burnmp3s at 8:18 AM on October 20, 2011


Sorry for the confusion regarding HSA and FSA accounts. I didn't read the question carefully enough, apparently. introp and dpx.mfx are correct about the HSA. On the plus side, it appears that partner intended to use FSA so two wrongs might make a right in this case.
posted by Lame_username at 8:26 AM on October 20, 2011


partner: "Thanks for all the good info. As it turns out, we have an FSA and that's fine for our needs. But, we want to figure as best we can the amount we'll need this year for medical so we don't lose any of it. I've studied the charts from lame_username's links and it looks like the rep is in the ballpark as far as the tax savings go just as introp said"

If you qualify for an HSA, it means you're on a high deductible plan (or have an option to join one). You _really_ want to have that deductible on hand. You can either pay taxes on it and keep it in savings account, or you can build it up in an HSA.

But keep in mind that medical expenses over 7.5 percent of your AGI are deductible if you choose neither HSA nor FSA. So what these account do is allow you to deduct _all_ medical expenses, limiting the true tax advantage these accounts offer. Also keep in mind that the investment opportunities in an HSA are really terrible. So if you go with an HSA, you probably want to target something like a few years worth of deductibles, or maybe the maximum CORBA length for if you lose the job (but I haven't looked into whether that would be a valid HSA expense), and then just contribute to an IRA.
posted by pwnguin at 7:35 PM on October 20, 2011


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