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IRS releases 2016 HSA deduction limit: Why does it matter?

The inflation-adjusted health savings account deduction next year is $3,350 for self-only and $6,750 with family coverage. As employers scale back health insurance coverage, the HSA is a common feature of high deductible health plans – for example, family coverage with a deductible more than $2,600.

What is the difference between a FSA and a HSA?

Both allow employees to contribute pre-tax earnings. The HSA has a couple unique advantages over the FSA. You carry savings over from year-to-year through an HSA account. In addition, you are able to take the account with you change jobs and invest to earn dividends and interest.

Flexible Spending Accounts have actually been around longer. In 2015, you can put away up to $2,550 to pay day care costs and other health care expenses. This allows you to pay medical costs pre-tax without the hurdle of the 10 percent adjusted gross income floor on itemized deductions for medical costs. But there is a caveat, you have to use the balance before the end of a year or you lose it.

Tax considerations with an HSA

The HSA can be a tool to reduce your total taxed wages. If possible, you may want to max out your contributions each year as a savings tool. Keep in mind the following tax requirements.

You need to keep records of contributions and withdrawals made to an HSA through the year and file IRS Form 8889. Failing to properly account for withdrawals can cause problem. Using a large withdrawal for an unqualified expense may land you with an unexpected tax bill.

For rollovers of HSA accounts or the transfer of an account after a death, seek the guidance of an experience tax professional.

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