The Biggest Break on Healthcare Spending: Medical Expense Deduction vs. Health Savings AccountSubmitted by Prosperity Advisory Group on June 19th, 2018
A trip to the doctor or to the pharmacy is a quick realization that the cost of healthcare is getting more and more expensive each year. You certainly don’t want to have a catastrophic event reveal how vulnerable you are to an influx of medical bills. Planning ahead, as always, has its perks. As an added bonus, you may be able to receive a tax break on some of these expenses. Two popular options to take advantage of deductions on health expenses are the Medical Expense Deduction and the Health Savings Account (HSA). Let’s take a look at what plan may be best for you.
Medical Expense Deduction
If you itemize your taxes, you may be familiar with the Medical Expense Deduction. You can now write off health care spending that exceeds 7.5% of your adjusted gross income (AGI).
In the past, 7.5% was only given to people 65 and older and everyone else had to exceed 10% of their AGI. For 2017 and 2018, everyone can take advantage of writing off expenses that exceed the 10% floor.
Keep in mind if you’re interested in taking advantage of the Medical Expense Deduction, you have to itemize your taxes and have medical expenses that exceed 7.5% of your AGI.
Health Savings Account
If you are enrolled in a high deductible health plan and aren’t enrolled in Medicare, a Health Savings Account may be a good fit for you. It can help you pay for medical expenses and save money on your taxes. One identified bonus of a Health Savings Account is that they are triple tax-free:
- Your contributions to an HSA are tax deductible – Contributions remaining at the end of the year in your Health Savings Account can be invested in mutual funds, much like a 401K.
- Your interest and/or earnings grow tax-free while in an HSA- You never have to pay taxes on the money within your Health Savings Account
- Your distributions for qualified medical expenses are tax-free- Money in the account can be used for medical, dental, vision costs and other health care expenses.
Of course, the IRS does put some limits on how much money you can contribute to this account. For this year (2018), the benefits cap at $3,450 (single) and $6,850 (family.) If you’re over the age of 55, you can add an additional $1,000 to the limits. An HSA is yours to grow, contribute to, and keep year after year.
Comparing the Two Options
Let’s assume you’re a single individual under the age of 55 with an adjusted gross income (AGI) of $30,000.
If you’re eligible for a Health Savings Account, you would be able to contribute up to $3,450 for 2018. Contributions are tax-deductible in the year they are made. Thus, you can deduct the full $3,450 on your tax return, no matter how much money you withdrew in order to pay for medical expenses.
In order to take advantage of the Medical Expense Deduction, you would have had to spend over $2,250 (7.5% of AGI) on medical care in order to receive any type of tax deduction. Only the expenses exceeding $2,250 would be deductible.
If using the Medical Expense Deduction, you would need to have $5,700 ($3,450 contribution + $2,250 floor) in medical expenses in order to reap the same tax benefits as the HSA contribution.
To learn more about how these strategies could benefit you, contact Prosperity Advisory Group so we can assist you on your financial journey to confidence.