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Tax Strategies & Credits

IRS to Boost Contribution Limit on Health Savings Accounts in 2023

by
Spencer Wilson
on
5/12/2022
IRS to Boost Contribution Limit on Health Savings Accounts in 2023

Health Savings Accounts, or HSAs, are popular tax-advantaged accounts that employees enrolled in high-deductible health plans through their employers can use to pay for qualified medical expenses. Now the accounts offer an even greater advantage, as the IRS has announced that as of 2023 those enrolled in both individual and family plan HSAs can increase the amount that they deposit each year.

There are numerous benefits derived from contributing to Health Savings Accounts. These portable plans can follow employees when they switch from one employer to another, with no “use-it-or-lose-it” requirement that balances be used up at the end of each year. Contributions are considered “above-the-line” tax write-offs that lower adjusted gross income, even for those who do not itemize. Additionally, their balance can be invested and can grow tax-free as long as it is eventually used for eligible medical expenses. 

For tax year 2022, eligible individuals enrolled in health insurance plans could deposit up to $3,650 and those enrolled in family plans could contribute $7,300. In response to inflationary pressures, the IRS has announced that for 2023 those maximum contribution levels will be boosted to $3,850 and $7,750, respectively. 

To be eligible for a Health Savings Account, you must be enrolled in a high-deductible health insurance plan. For individuals, this means that the annual deductible for your plan must be at least $1,500, while for families the deductible doubles to $3,000 per year.  

Although the tax code refers to these plans as “health” savings accounts, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement plan options, an HSA provides another resource for retirement savings—one that isn’t limited by income restrictions in the way that IRA contributions are. 

Since there is no requirement that the funds be used to pay medical expenses, a taxpayer can pay medical expenses with other funds, allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses. Unlike traditional IRAs, no minimum distributions are required from HSAs at any specific age.

Withdrawals from an HSA that aren’t used for medical expenses are taxable and subject to a 20% penalty, with one exception: an individual age 65 or older will pay income tax on non-medical related distributions from their HSA but won’t owe a penalty for using the funds for other than medical expenses. 

Example: Henry, age 70, has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is both tax and penalty-free. If Henry had been 64 years old or younger, he’d be taxed on the $6,000 and pay a penalty of $1,200 (20% of $6,000).

Contact your tax advisor if you have questions or need additional information about the benefits of HSAs.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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