Are all contributions to HSA tax-deductible?

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Are all contributions to HSA tax-deductible?

Postby amador » Fri Nov 16, 2012 12:17 am

So, I started with a new employer in September and enrolled in a high-deductible PPO with a Health Savings Account associated. I have pledged a 5% pre-tax portion of my salary to the HSA. The account is currently quite small. Also, there is a small possibility that I may have to undergo a rather invasive dental procedure next year.

My question is, if I decide to add more money than my salary deduction before the end of 2012, and/or if I decide to put some extra money next year in the event that I have to face dental expenses, would I be able to deduct these after-tax contributions from my tax return?

Thanks!
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Re: Are all contributions to HSA tax-deductible?

Postby grabiner » Fri Nov 16, 2012 1:03 am

Yes, any money that you contribute after-tax to an HSA, up to the IRS limit is subtracted as an adjustment to income. (This is better than a tax deduction, as you can subtract it even if you don't itemize deductions.)

Because of the tax subsidy, it's usually a good idea to contribute to the HSA in preference to investing elsewhere such as an IRA or 401(k) (except if your employer matches 401(k) contributions). If you contribute to an IRA, you can deduct the contribution from your taxable income, but you will pay tax on withdrawals (and a penalty if you withdraw the money before retirements). If you contribute to the HSA, you can deduct the contribution from your taxable income, and you can withdraw from the HSA tax-free to pay medical expenses at any time.

It's even better to contribute by payroll deduction, as this amount is exempt from Social Security and Medicare tax, as well as federal tax and (in many but not all states) state tax. If your employer allows a fixed-dollar amount, it makes sense to set up the contribution so that it totals $3250 for each year.
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Re: Are all contributions to HSA tax-deductible?

Postby livesoft » Fri Nov 16, 2012 3:16 am

One has to understand that the OP used the word "all" in their question. There is a a limit to the amount one can contribute. If one contributes over the limit, there are what I think are rather severe penalties. Thus, technically all contributions are not tax-deductible.

Furthermore, there can be monthly limits as well, so front-loading contributions can be problematic, too. Please read and understand the IRS publication on this.

And finally, one's dental plan can be different from one's HDHP which may factor into this.
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Re: Are all contributions to HSA tax-deductible?

Postby Dinero » Fri Nov 16, 2012 8:42 am

Based on the OP's signature it seems possible that the OP is a California resident.

If that is the case, the HSA contribution is not deducted from income for state income tax purposes.
Last edited by Dinero on Fri Nov 16, 2012 12:13 pm, edited 1 time in total.
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Re: Are all contributions to HSA tax-deductible?

Postby Spirit Rider » Fri Nov 16, 2012 12:06 pm

Your maximum individual tax deductible HSA contribution is normally based on a monthly pro-rated amount of the applicable HSA contribution limit. The pro-ration calulation is "number of months eligible" / 12

For 2012, the limits are $3100 single and $6250 married, with an extra $1000 if you are 55+. Starting your HDHP in September you have 4 months of HSA eligibilty. So your pro-rated contribution limit is 4/12 or 1/3. You can safely and easily contribute $1033.33 single and $2083.33 married if <55.

There is a "full contribution" rule. You may contribute the full year's contribution limit if you are eligible on December 1st of the partial year. There is a 13 month testing period. You must remain eligible for a HSA until December 31st of the following year. You could be subject to a 20% penalty and tax on the non-qualified contributions.

However, like IRAs you have the opportunity to correct excess contributions. You have six months after the tax filing date (October 15th-ish) to request the HSA custodian remove excess contributions and all earnings. The excess contribution and earnings lose there deductiblity, but there will be no penalty.

So you can take a calculated risk and fully fund this years maximum contribution. This would be the maximum contribution minus any contributions made by you and your employer on your behalf. One thing to keep in mind is that contributions made by payroll deduction are also not subject to FICA. You will save the most by maximizing your payroll deduction.

Note: Provided you have the funds to do so and it is within your HSA contribution plan. You can make a full direct contribution in January for the whole year. However, even if your plan is to maximize your HSA contributions, it still makes sense to maximize your payroll deducitons during the year. Once you are eligible for HDHP/HSA the order of contribution/expense is not important only the yearly contribution limits matter.
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Re: Are all contributions to HSA tax-deductible?

Postby amador » Sat Nov 17, 2012 2:24 am

Thank you so much for the informative and insightful responses. As someone pointed out, I do live in California. I understand that HSA contributions can't be deducted from state tax.

I'm married, and I've been with my current employer since 09/01. I understand, then, that my max contribution for 2012 could only be $6,250/3 (1/3 of a year). I also understand that if I go over the allowable limit, I may face penalties.

One more question. Do the contributions have to be within the calendar year, or is there a grace period until April 15th, as in the case of IRAs?
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Re: Are all contributions to HSA tax-deductible?

Postby jebmke » Sat Nov 17, 2012 2:29 am

amador wrote:Thank you so much for the informative and insightful responses. As someone pointed out, I do live in California. I understand that HSA contributions can't be deducted from state tax.

I'm married, and I've been with my current employer since 09/01. I understand, then, that my max contribution for 2012 could only be $6,250/3 (1/3 of a year). I also understand that if I go over the allowable limit, I may face penalties.

One more question. Do the contributions have to be within the calendar year, or is there a grace period until April 15th, as in the case of IRAs?

You have until April 15 of next year.
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Re: Are all contributions to HSA tax-deductible?

Postby Dinero » Sat Nov 17, 2012 6:01 am

amador wrote:Thank you so much for the informative and insightful responses. As someone pointed out, I do live in California. I understand that HSA contributions can't be deducted from state tax.


Note too that earnings in the HSA are taxed by California during the year they are received. TBills, TNotes, and TBonds, of course, are not taxed at the state level.

Also, anything coming out of the HSA is not included as income in California tax returns.
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Re: Are all contributions to HSA tax-deductible?

Postby amador » Sat Nov 17, 2012 11:05 am

Dinero wrote:
amador wrote:TBills, TNotes, and TBonds, of course, are not taxed at the state level.


Same would apply to CA bonds, then?
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Re: Are all contributions to HSA tax-deductible?

Postby Spirit Rider » Sat Nov 17, 2012 12:44 pm

amador wrote:Thank you so much for the informative and insightful responses. As someone pointed out, I do live in California. I understand that HSA contributions can't be deducted from state tax.

I'm married, and I've been with my current employer since 09/01. I understand, then, that my max contribution for 2012 could only be $6,250/3 (1/3 of a year). I also understand that if I go over the allowable limit, I may face penalties.

One more question. Do the contributions have to be within the calendar year, or is there a grace period until April 15th, as in the case of IRAs?

Normally, your "safe" max contribution would be $6250/3. There is an "full contribution" rule, if you are eligible on December 1st you may make the full $6250 contribution. The caveat is that there is a 13 month testing period. You must remain eligible until December 31st of the following year or the difference between $6250 and $6250/3 becomes an excess contribution. You have until six months after the tax filing dealine to withdraw this excess contribution.

So in your particular case, you "could" make a full contribution for 2012. If you changed jobs or lost HDHP eligibility in the 10 1/2 months after 12/1/12, you could withdraw the excess contribution without penalty. So you just have a 2 1/2 month window where if you lost HDHP eligibilty you would be subject to the 20% penalty. Since many companies now institute significant delays in benefits eligibility, even this may be managable if you changed jobs.
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Re: Are all contributions to HSA tax-deductible?

Postby Dinero » Sat Nov 17, 2012 5:05 pm

amador wrote:Same would apply to CA bonds, then?


Yes, although you are "wasting" that federal tax exempt bond/fund in an already federally exempt account. Although with today's rates that may be a good move. :happy
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Re: Are all contributions to HSA tax-deductible?

Postby amador » Sat Nov 17, 2012 8:53 pm

Spirit Rider wrote:
amador wrote:The caveat is that there is a 13 month testing period. You must remain eligible until December 31st of the following year or the difference between $6250 and $6250/3 becomes an excess contribution. You have until six months after the tax filing dealine to withdraw this excess contribution.

So in your particular case, you "could" make a full contribution for 2012. If you changed jobs or lost HDHP eligibility in the 10 1/2 months after 12/1/12, you could withdraw the excess contribution without penalty. So you just have a 2 1/2 month window where if you lost HDHP eligibilty you would be subject to the 20% penalty. Since many companies now institute significant delays in benefits eligibility, even this may be managable if you changed jobs.


Let me see if I understand well: I can make a full year contribution for 2012 if I am reasonably certain that I will remain with the same insurance plan / employer by 12/31/2013?
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Re: Are all contributions to HSA tax-deductible?

Postby Spirit Rider » Sun Nov 18, 2012 1:50 am

amador wrote:
Spirit Rider wrote:
amador wrote:The caveat is that there is a 13 month testing period. You must remain eligible until December 31st of the following year or the difference between $6250 and $6250/3 becomes an excess contribution. You have until six months after the tax filing dealine to withdraw this excess contribution.

So in your particular case, you "could" make a full contribution for 2012. If you changed jobs or lost HDHP eligibility in the 10 1/2 months after 12/1/12, you could withdraw the excess contribution without penalty. So you just have a 2 1/2 month window where if you lost HDHP eligibilty you would be subject to the 20% penalty. Since many companies now institute significant delays in benefits eligibility, even this may be managable if you changed jobs.
Let me see if I understand well: I can make a full year contribution for 2012 if I am reasonably certain that I will remain with the same insurance plan / employer by 12/31/2013?
All that is necessary is that you remain on a HDHP plan through 12/31/2013. You could remain with your current employer, change employers/insurance plans, or extend via COBRA.
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