You know that you can claim some tax breaks on your health care spending. And that HSAs and FSAs are supposed to be a great tax-free ways to save for medical costs.
But now that it’s time to file your taxes, where do you start? And what do you need to prepare to be ready to file?
Let’s boil it down to the essentials here.
There are two main places in federal income taxes where you need to worry about medical expenses: your itemized deductions and your HSA. If you have an FSA or HRA, don’t worry. There’s nothing additional you need to do with these accounts for your income taxes.
For Itemized Deductions
Decide if you’re going to itemize. When you decide to itemize your taxes, you’re choosing to claim all the deductions that you qualify for, item by item, instead of taking the standard deduction. The standard deduction is the same for everyone of each filing status (single, married, etc), so you’ll save more money by itemizing if your own deductions exceed the standard deduction.
When it comes to health care expenses, you need to have spent a lot on Qualified Medical Expenses to be eligible to itemize. What is a lot? The IRS says 7.5% of your Adjusted Gross Income (AGI). If you didn’t spend this much in 2011, don’t bother itemizing health expenses. You can count spending for any of your dependents or your spouse. Any spending that exceeds 7.5% is deductible.
Just about anything related to diagnosing and treating injury or disease counts as a Qualified Medical Expense. For a complete list: www.irs.gov/publications/p502/index.html
To itemize, you’ll need Form 1040. You cannot itemize with the 1040EZ or 1040A.
Look for your 1099-SA in the mail. This form will be sent by your HSA administer and will show both how much was contributed to the account and how much was withdrawn (distributed). HSAs are not subject to the same 7.5% of AGI as are deductions. Use your 1099-SA to complete Form 8889—the form just for reporting HSA contributions and distributions.
If you already paid a large chunk of money on medical expenses in 2011, but didn’t contribute as much to your HSA to match, there’s a way to still get that money counted as a tax-free HSA contribution. In fact, up until April 15th, your HSA contributions will still be considered a part of 2011. And as long as the cash amount of your contributions for the year matches your expenses for the year, they’ll count.
To take advantage of this, first find out how much you contributed to your HSA in 2011 (log in to your Simplee account to see). The annual maximum contribution is $3,050 for a single person, $6,150 for a family. If you’re below your limit, determine much you already spent in out-of-pocket medical costs (also on Simplee!). Deposit as much of this as you can, up until the limit, into your HSA. If you can’t afford to keep that much in your HSA at the moment, no problem—you can now withdraw it as cash, but still get the HSA deduction on the amount.
So for example: Let’s say you’re single and contributed $2,000 to your HSA last year. And you had $800 in out-of-pocket medical expenses, which you already paid. You still have a lot of room before you reach your limit of $3,050—almost $1,000. You can deposit $800 in your HSA, and then immediately distribute it. You’ll get the full deduction on that $800 through your medical expenses, as well as the full amount counted towards the HSA tax benefit.
And finally, keep receipts and records. You don’t have to submit these with your taxes—all you need is just one number: how much your Qualified Medical Expenses turned out to be. However, you should keep the proof on hand in case you are audited.
These rules will apply to most people. However, if you’re self-employed, your situation might be different. Visit www.irs.gov or talk to a tax advisor to get the best advice.