UPDATE: To find out the 2019 HSA contribution limits, click here.
As 2018 got underway, most health savings account users were under the impression that the family limit for contributions would be $6,900. But a new announcement from the Internal Revenue Service (IRS) may have thrown a wrench in the plans of those going for the biggest possible tax benefit.
HSA family contribution limit reduced to $6,850 for 2018
According to Internal Revenue Bulletin 2018-10 released in early March, changes put in place by the Tax Cuts and Jobs Act of 2017 caused the IRS to recalculate the limit. This is because the tax law applies the so-called chained "consumer price index" (more on that later!) to calculate HSA contribution limits.
However, while the family limit has been reduced by $50 for 2018, the HSA individual contribution limit will stay at $3,450.
What? Why? Price index?
Now, stay with us here. Each year, the IRS takes a look at contribution limits for FSAs, HSAs and other accounts to see if they need to be raised or lowered with inflation. This recent HSA change occurred because the government altered the way it calculates inflation adjustments.
According to BenefitsPro, the tax reform bill switched the formula for HSA contribution limits from CPI-U -- sometimes called the "chained price index" and shorthand for "Chained Consumer Price Index for All Urban Consumers."
This was replaced by CPI-W -- the "Consumer Price Index for Urban Wage Earners and Clerical Workers," which is calculated by the U.S. Bureau of Labor Statistics each month.
What's the difference between these two methods of calculation? The Bureau of Labor Statistics explains it in detail here, but here's our take on the situation.
CPI is calculated annually by looking at changes in the prices of goods and services established by the Bureau of Labor Statistics. For example, you probably paid more for milk this year than you did five years ago, because of inflation. Well, changing CPI rates reflect inflation the same way.
As opposed to the larger sample size (seen in CPI-U) that was used to calculate HSA contribution rate changes, the tax reform bill shifted to the much smaller sampling (CPI-W) which doesn't place as much emphasis on medical care prices.
The funny thing about this is, despite various GOP efforts to increase HSA contribution limits, it appears that their celebrated tax reform bill ended up reducing HSA limits for 2018. But it's no laughing matter if you made the max contribution for 2018 because you have some work ahead of you!
If I contributed $6,900 to my HSA, what do I do?
If you've made the maximum HSA contribution for 2018, don't fret, there's still time to avoid any tax penalty issues. According to Kaiser Health News, those who've made a $6,900 contribution to their accounts still have time to be reimbursed for that overage. Just ask your HSA administrator to return your $50 with any earnings that have accrued before next tax season.
But don't wait on this! If you leave your full contribution unchanged before next tax season, it directly affects your taxable income total which may result in an audit. Additionally, you'll be on the hook for a 6% penalty for exceeding the HSA maximum contribution, so the sooner you take care of this, the better!
Workplace benefits like Flexible Spending Accounts (FSAs) are well-known for their ability to cover a wide variety of medical services and products, but they can also provide a major boost for employees through year long tax savings. With April 15 (Tax Day) on the horizon, now is a great time of year to discuss the many tax benefits that come with FSAs and how they can put more money back into your pocket and alleviate your concerns when medical expenses pop up. Learn more about FSA eligible expenses via FSAstore.com.
How do FSAs affect my tax earnings?
According to Bank Rate, the vast majority of companies will offer one of two FSAs – a Dependent Care FSA that covers costs like day care and other child-related expenses while parents can work, look for work, or attend school full-time, and a medical FSA that covers routine medical expenses. In both cases, money is taken out of your salary with payroll reductions each month on a pre-tax basis. Simply put, these funds are placed into an FSA on a pre-tax basis, reducing taxable income and providing more savings in the long run.
Do I need to do anything extra around tax time?
While there is a lot of jargon and conflicting information out there, filing taxes with an FSA is extremely easy. It's important to remember, while you can use your FSA for countless medical products and services, the account is not really yours, but the employer's. While you don't need to add anything specific to your tax return, you should be mindful of how much money is available in your FSA, as well as what you'd like to spend/carry over to the next year.
Currently, employees can allocate up to $2,500 per year in their FSAs. If the FSA runs on a calendar year basis, FSA holders typically have a deadline to use their funds by December 31, or if an employer utilizes the IRS's grace period, this is extended to March 15. It's important to note that these grace periods are not required by the IRS, so it's vital to check with an employer to see if this policy is in place. Last but not least, thanks to a new U.S. Treasury Department ruling, employees may be permitted to roll over up to $500 of their FSA funds to the next year, which can allow them to better plan their spending each year.
Can I itemize my FSA expenses?
According to Tax Brain, employees who have an FSA can itemize their deductions come tax season, but they will not be able to apply their FSA expenses when itemizing. Remember, this money has been placed in the account on pre-tax basis, so this would be considered double-dipping. Another key point to remember is that medical expenses must be at least 10 percent of your adjusted gross income (AGI), to qualify as deductions.
Ultimately, by staying on top of your FSA funds, being aware of employer policies and spending wisely, FSAs can be extremely beneficial for your long-term budget. An FSA will change little when it comes time to file a tax return, but utilizing the benefit throughout the year and being mindful of allocations can help you realize major tax savings each year.