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Some Things Get Better with Time

Fine wine, balsamic vinegar, cheese, and certain tax breaks have something in common. They can get better with age. Case in point: consider this sample list.

RETIREMENT PLAN CONTRIBUTIONS

If you’re 50 or older, catch-up contributions allow you to add an additional $1,000 to qualified retirement accounts, such as IRAs and 401(k)s. Contribution limits are based on modified adjusted gross income and begin to phase out at higher income levels.

HIGHER HEALTH SAVINGS ACCOUNT (HSA) LIMITS

Similarly, qualified individuals aged 55 or older may increase deferrals to HSAs by up to $1,000 for an annual contribution of $5,150 (single) or $9,300 (family) versus $4,150 and $8,300 for younger taxpayers with qualified high-deductible medical plans.

NO WITHDRAWAL PENALTIES

At age 59 1/2, you’re no longer subject to the usual 10% early withdrawal penalty on withdrawals from IRAs and 401(k) plans. At 65, you may withdraw HSA funds for non-medical expenses without paying an additional tax penalty. However, ordinary income tax rates apply to unqualified medical expenses.

AN EXTRA STANDARD DEDUCTION

Once you turn 65, you become eligible for an additional standard deduction. The extra deduction reduces taxable income, potentially lowering your overall tax liability. The amount of this extra standard deduction can vary based on filing status and whether you or your spouse are 65 or older. Another factor is whether you or your spouse is blind. Generally, for 2024, the deduction amounts are $1,950 if you’re single or file as head of household and $1,550 each for married, filing jointly or separately. They double for taxpayers 65 and older and blind.

This list isn’t all-encompassing. If you’re unsure whether any tax provision, credit, or deduction applies to you, consult a trusted tax professional.

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Higher 2024 HSA and HDHP Limits

There’s good news for you and your employees if you offer a high-deductible health plan (HDHP) and health savings accounts (HSAs). In one of the largest jumps in recent years (7.8%), the HSA contribution limits for 2024 will rise to $4,150 (from $3,850 in 2023) for employees with single health plan coverage and to $8,300 (from $7,750) for those with family coverage. Workers aged 55 and older can contribute an extra $1,000 (unchanged from 2023). So an older married couple will be able to contribute $10,300 in 2024.

Your high deductible health care plan will qualify if the 2024 annual deductible is at least $1,600 for self-coverage or $3,200 for family coverage.

Employee out-of-pocket expenses (deductibles, copayments, coinsurance, and some uncovered services) cannot exceed $8,050 (self-only) or $16,100 for family coverage.

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July 2023 Question and Answer

QUESTION:

Is a gym membership a medical expense that can be paid by an HSA or FSA?

ANSWER:

Yes, but only if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease).

Otherwise, the cost of a gym membership is for the individual’s general health and is not a medical expense.

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Triple Tax Advantages of HSAs

Medical Tax Savings Web Header Banner – Health savings account or flexible spending account – HSA, FSA, tax-sheltered savings

If you have a high-deductible health insurance plan, you’re likely eligible to open a health savings account (HSA). Similar to flexible spending accounts, these tax-advantaged savings accounts allow you to contribute money to cover your medical expenses. But HSAs have three distinct tax advantages.

TAX-FREE CONTRIBUTIONS

Just like 401(k) contributions, you can make pre-tax payroll deductions to fund your HSA. You’ll benefit from having lower taxable income and a generous contribution limit. In 2021, a family can contribute up to $7,200 while singles enjoy a $3,600 limit.

TAX-FREE GROWTH

If your HSA funds are invested in mutual funds, stocks, or other similar vehicles the earnings are tax-free, leaving more money to cover medical expenses. Unlike a flexible spending account (FSA), where contributions don’t roll over at the end of the year, money in an HSA can be used in the future. And HSAs don’t have required minimum distributions like 401(k) or IRA plans.

TAX-FREE WITHDRAWALS

When your HSA funds are used to pay for qualified medical expenses, these withdrawals are tax-free. Qualified medical expenses include things like office visits, co-pays, dental expenses, vision care and prescription medication for you, your spouse, or your dependents. Just remember you can’t use HSA money to pay for medical expenses you incurred before establishing your HSA.

RETIREMENT PLANNING & HSAs

Using an HSA is not only a savvy way to save on taxes; it can help you in retirement. If you contribute to your HSA while not making withdrawals you could accumulate a sizeable fund to help cover your medical expenses in retirement. Medicare premiums are a qualified medical expense, so you could use your HSA funds to pay your premiums once you retire.