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Jesse Handel
Jesse Handel, Tax Preparer
Category: Tax
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Experience:  10 years tax preparation. IRS Registered Tax Preparer.
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If I contribute to an HSA, how does this affect my tax refund?

Resolved Question:

If I contribute to an HSA, how does this affect my tax refund? If I use all, some, or none of the funds, does this have an impact?
Submitted: 1 year ago.
Category: Tax
Expert:  Jesse Handel replied 1 year ago.
Thank you for allowing me to help you with your question. If you go to www.irs.gov, "current publications", and look up Publication 969, it contains all of the rules and details about health savings accounts and other tax-preferred medical programs. The Health Savings Account(HSA) provides tax benefits because the money that you or your employer contributes to your HSA is money that isn't taxed as part of your wages. The amount of your contribution will be deducted from your wages before the taxable income is calculated. You have to be careful to follow the rules of the HSA and maintain high-deductible medical insurance coverage for yourself or your family (as applicable) for the entire year. Any month that you are not covered by the high-deductible insurance plan will make the HSA contributions for that month taxable. The amount of any HSA contributions for any months that you are not eligible will be added to your taxable income on your tax return and added to your taxes.
Two things to be aware of are: 1) the IRS has changed the deductible health expense rules so that over-the-counter drugs can no longer be purchased as a deductible medical expense and 2) you're probably already aware of this, but any medical expenses you pay for with money from the HSA can't be deducted on Schedule A since the medical expense was already paid with pre-tax money.
I hope this answers your questions. Please let me know if you need any additional information about this topic. I want to make sure that you are satisfied with the answer that you receive. Thank you for letting me help you.
Customer: replied 1 year ago.
Thank you for your reply. I've followed the aforementioned rules. What I really want to know is, all things being equal, and understanding that you aren't privy to any other of my information, would one typically get a higher tax refund or a lower tax refund if one have an HSA. I ask because I'm filing my taxes via H&R block and it seems like if I spend all, some or none of my HSA that my tax refund is impacted. Thanks again.
Expert:  Jesse Handel replied 1 year ago.
Unless you are in a tax situation where you qualify for earned income credit, lowering your taxable income will reduce your taxes. Since your contribution is deducted from your taxable income, spending money out of your HSA won't affect your taxes unless you spend the money for something other than legitimate medical expenses in which case that money would become taxable and you would may incur a penalty as well (depending on the reasons and the situation).
There are only two situations in which higher taxable income can help you. If you receive child tax credit and you don't owe enough taxes to use up the entire child tax credit, then you have to earn at least $3000 to receive the additional child tax credit as a refundable credit. Or, if you can qualify for the earned income tax credit, the income versus the amount of earned income credit is a parabolic curve. Up to a certain income level, the more money a taxpayer earns, the greater amount of earned income credit they can receive. For each filing status and number of children, there is an income level at which the earned income credit maximizes and then begins decreasing with additional earned income. If a taxpayer is on the increasing side of the income curve, then having more taxable income may result in receiving more money through the earned income credit.
Based on your question, it sounds as if you won't be affected by either of these situations. If you might be affected by the earned income credit situation, then if you tell me your filing status (single, head of household, qualifying widow(er), married filing jointly or married filing separately) and the number of dependent children you have (three children are the maximum that can be used for earned income credit); then I can tell you at what income the curve peaks and then increased taxable income results in lower earned income credit. Also, if your filing status happens to be married filing separately, then you can't qualify for the earned income credit, so changes in your taxable income won't make any difference.
The IRS still hasn't released all of the tax forms in their final form yet. The HSA form is Form 8889 and as far as I can tell from the IRS website, they have released that form for use. It will probably be worth your time to call your H&R Block office and make sure that form is ready for use, before you have your taxes done, if you are going to have them prepared soon. That way, you won't start doing your taxes only to find out that you have to go in a second time because their computers can't use that form yet.
The "fiscal cliff" negotiations left the IRS holding the bag for making the last minute changes to their forms and instructions after the tax laws were finalized. As a result, the IRS won't accept returns until January 30 (they are trickling a few in for test purposes, but most returns won't be accepted by the IRS until the 30th). Also, the information we have received from the IRS is to expect your refund at least 21 days after they accept your return. Some people's refunds will probably go out earlier, but you can't count on getting a refund until Feb. 21st or later, even if you have your tax return prepared and waiting on H&R Block's computer by the 30th.
Again, if you want more information, just ask. I'll be happy to look up the earned income credit if you would like. I will be signing off for the night pretty soon, so if I don't get back to you tonight, I will reply in the morning.
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 270
Experience: 10 years tax preparation. IRS Registered Tax Preparer.
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Jesse Handel
Jesse Handel
Tax Preparer and Chemist
146 Satisfied Customers
10 years tax preparation. IRS Registered Tax Preparer.