Health Savings Accounts can reduce tax bills; beware the paperwork

At this time of year, many people are looking for ways to reduce their tax bills. One option may be to make a contribution to a health savings account.

You can still make contributions for the 2018 tax year to an HSA until the federal tax filing deadline in April, if you qualify.

HSAs are special savings accounts that offer multiple tax benefits. Money is deposited tax free and grows tax free. It's also withdrawn tax free, as long as funds are spent for eligible medical and health expenses.

According to Optum Bank, which offers health savings accounts, if you are in the 28 percent tax bracket and deposit $3,000 into your HSA, you could save $840 in federal income tax.

You can use the money in the accounts to pay for current health expenses, such as doctor bills or dental care that your insurance doesn't cover, or invest the money and let it grow to help cover future costs. There's no spending deadline. And if you change jobs, the HSA goes with you.

For 2018, an individual can contribute up to $3,450, while the maximum contribution for family coverage is $6,900. People 55 and older can save an extra $1,000. There are no income limits on who can contribute.

To use an HSA, however, you must have a specific type of health plan that has a high deductible — at least $1,350 for an individual, and $2,700 for a family, for 2018 — and meet other criteria, too. You can't, for instance, contribute to an HSA if you are covered by Medicare.

If you took money from the account, you will receive Form 1099-SA, documenting the total spent in 2018. This form will help you fill out Form 8889, which calculates your HSA deduction and is filed with your tax return.

If you put money into an HSA last year, you'll receive Form 5498-SA, showing the contributions. (If you add extra cash to the account now for 2018, you can expect to get an updated form by the end of May.)

HSA contributions made by you or your employer through payroll deductions also show up on your W-2 wage and tax statement. If the amounts on your W-2 and 5498-SA don't match, it's probably because you made after-tax contributions or made a contribution between Jan. 1 and tax day for the previous tax year, according to Optum Bank.

"It is a paperwork hassle," said Delia Fernandez, a fee-only financial planner in Los Alamitos, Calif.

But the tax savings, she said, make the document shuffling worth it.

Unlike traditional individual retirement accounts, he noted, HSAs do not have required minimum distributions — a date by which savers must begin withdrawing money so it can be taxed. That means funds in HSAs can grow for longer periods.

"There are numerous attractive tax elements to it," Crowell said.