Compound It! Using your HSA for caregiving

As the Baby Boomer population continues to age, many of them are having to rethink their living situations. Some are transitioning to senior living centers, some are choosing retirement communities, and others are renovating their homes to be more suited for their needs.

But another subset of the population is leaning toward another option: moving in with their children. For adult children, taking care of their parents can be extremely fulfilling, especially if they're in their later years.

Fortunately, caregiving can be extremely financially rewarding too, with little-known tricks that people can take advantage of. Read on to see how an HSA can be used to save and prepare for caregiving expenses, now or in the future.

First, the basics

There are several rules and limitations regarding using an HSA for caregiving, which must be followed to the letter. First, your parent must be your dependent, per the definition set by the IRS.

To be eligible for dependency status, the parent must be a resident or citizen of the U.S. or a resident of Canada or Mexico. They must be your biological or adopted parent. Foster parents are not eligible to be claimed until they have lived as part of your household for at least one year.

If your parent lives with you full-time and you provide more than half of their financial support, then they may qualify as an official dependent that you can claim on your taxes. Your parent has to report that they're a dependent when they file their own taxes. Your parent also cannot have more than of $4,050 in gross income, which fortunately excludes Social Security benefits.

Just like other HSA rules, you can only spend HSA funds on qualified medical expenses. For example, if your mother gets prescribed a medication that's not completely covered by Medicare, you can pay for it out of your HSA (provided your mother is a qualified dependent as discussed above). If their doctor recommends home health products, you can buy them with HSA money, too.

You can't spend HSA money on non-qualified expenses, even if they relate to your dependent parent. Anything you purchase with your HSA card still has to fall under HSA eligibility guidelines; you can find a list of some eligible items here.

The tax benefits of caregiving

If you've previously been paying for your dependent mother's diabetes medication out of pocket, you'll find a nice tax bump once you start using your HSA.

The best way to save on your taxes if you're taking care of your qualified dependent parent is to contribute the maximum to your HSA. Currently, the 2021 HSA contribution limit is $3,600 a year for those participating in the health plan as an individual and $7,200 a year for those participating in the health plan as family. If you're 55 and older, you can contribute an extra $1,000 annually.

Remember, you still need to have a high deductible health plan (HDHP) to use an HSA. You can't open one just to take advantage of caregiving expenses if you don't have an eligible health insurance plan. Currently, the requirement for an HSA-qualifying plan is a deductible between $1,400 and $7,200 for individuals and between $2,800 and $14,000 for families.

Before you sign up for an HDHP, do the math to make sure you won't pay more out of pocket. It's not worth saving $200 on your taxes if you'll spend thousands more overall.

If your parent is on Medicare, they can't open their own HSA plan. The same eligibility rules that apply to all HSA participants apply to them. If they have a previous HSA that still has money in it, encourage them to spend that down before using your own funds.


Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.

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