The $6,000 Tax Deduction That You're Probably Forgetting

By Miranda Marquit
April 10, 2013

You've maxed out on contributions to your traditional IRA, so there's nothing left for you to do, right?

Wrong.

You can make previous year contributions to your Health Savings Account (HSA) until April 15.

What is an HSA?

A Health Savings Account helps you manage your health care costs. According to a 2012 report from America's Health Insurance Plans (AHIP), more than 13.5 million Americans are covered by them. If you choose a qualified health plan with a high deductible, you can open an HSA.

Your contributions to an HSA are tax deductible, up to $3,100 in 2012, and $6,250 for families. The 2013 limit will increase to $3,250 for individuals and $6,450 for families.

On top of receiving a tax deduction, money in an HSA grows tax-free -- as long as you use your withdrawals for qualified health care costs. If your employer offers an HSA, you can also receive employer contributions.

While many HSAs feature money market accounts with fairly low yields, you aren't limited to those investments. It's possible to use your HSA to invest in stocks and bonds and to use index funds and exchange-traded funds to get the job done. You can even hold a few more exotic investments in an HSA.

It is important to realize that your HSA isn't FDIC-insured, even if you open it at a bank.

In many ways, the HSA is a lot like an IRA. If you withdraw money from the account for non-medical reasons before age 59 1/2, you are subject to a 10% IRS penalty, and you have to pay income tax on your distributions. Once you reach age 59 1/2, you can withdraw money for non-medical reasons, but you will pay income tax on the distributions -- just as you would with an IRA.

You don't have limits on withdrawing the earnings at any time with an HSA.

Contribute To An HSA By April 15

Also, like IRAs, if you are looking for a tax deduction for 2012, you have until April 15, 2013, to make a previous-year contribution to your HSA.

In order to make your previous-year contribution, make sure you indicate the year for which the funds should be applied. You can only claim your deduction once

Even if you are no longer eligible for an HSA in 2013, but you still have room to fund an HSA for 2012, you can make a previous-year contribution. You have until April 15 to make that contribution.

This strategy can be a good way to reduce your income for the previous year if you are looking for another tax benefit. Your deduction probably won't make a big difference by keeping you out of the next tax bracket. However, if you are on the verge of phasing out for some income-related deductions and credits, reducing your income to keep you below the phase-out level can be a great help.

If you have already filed your tax return and want to include an HSA contribution for the previous year, you will need to file an amended return to take advantage of HSA contributions made before April 15.

The Investing Answer: If you are looking for another tax deduction, and you were eligible for an HSA in the previous year, you can contribute by April 15 and mark it a prior-year contribution. Check your eligibility, and consider the advantages of the truly tax-free growth available with an HSA.