It's Tuesday, so let's talk about taxes. Paying them isn't fun even though there are some obvious benefits to them (um, functioning traffic lights anyone?).
Even if you can't avoid them, you can at least pay less of them. Considering the recent tax changes, you may be able to maximize your tax breaks even more, if you play your cards right. By putting your money into health savings accounts (HSAs), not only do you pay less in taxes, you get the benefit of saving on health expenses for your family. But first, there's one other consideration.
Learn to love the 529 account
It's no secret that college is expensive, and costs will continue to increase. You're looking at an average of $70,000 for private college tuition just for the current academic year. If your child is currently in elementary school, don't even try to imagine how much it'll cost -- you might be setting yourself up for a bad case of shock. However, if you're a numbers person, you can safely assume that you're looking at almost half a million dollars, based on the current 2.5% inflation rate.
If you're planning on helping with school costs, minimizing taxes is the way to go. Many employers offer 529 accounts, which is a tax-advantaged savings account designed to help pay for schooling.
These tend to also be sponsored by the government and allows for money invested to grow tax-deferred and withdrawn to be used for qualified educational expenses. As in, any interest you earned doesn't count as taxable income, helping you pay less in taxes (cha-ching!).
Depending on where you live, some state sponsored plans even offer promo codes or discounts during enrollment period. For example, the Florida prepaid plan offers a percentage off their enrollment fee at certain times of the year. The state of Indiana offers a 20% tax credit on the first $5,000 you put into a 529 each year.
Starting this year, you can now use money from your 529 account for private elementary and secondary education. Meaning you can save money on taxes and on tuition. Pretty much a win-win situation.
HSAs = "A triple threat"
- So, what do private schools and college funds have to do with health savings? Well, it turns out HSAs are an awesome way to catch a tax break. They're unique in that you can get tax-free earnings on interest, tax-free withdrawals (as long as you're using it for qualified health care expenses) and tax-deductible contributions. Think about it: you save money on taxes, earn interest and be able to save money on health care expenses.
Money you put in just rolls over from year to year. The cool thing too is that you don't need to withdraw any funds from your HSA until years down the line, as long as you're taking money out for expenses you'll have after you open your account.
Getting an HSA helps you reduce your gross income. As in, what you contribute into an HSA isn't considered part of your salary and isn't subject to tax. You may even be able to pay even less in taxes if your HSA contributions happens to put you in a lower tax bracket. Keep in mind that being able to maximize these tax breaks means not using money from the HSA.
So folks, if you're already contributing to these tax-advantaged accounts, great. If not, you may want to consider doing so. After all, what do you really have to lose… other than paying lower taxes?
Tax Facts is a column offering straight up, no-nonsense HSA tax and financial tips, written in everyday language. Look for it on Tuesdays, exclusively on the HSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.