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Health insurance premiums have increased every year recently for us as our insurance carrier tries to keep up with escalating costs.
Price Waterhouse has already estimated an 8.5% increase in costs next year.
It may be impossible to escape this increase but there are ways to leverage health care expenses to cut your taxes.
Flexible Spending Accounts
Flexible spending accounts (FSA) are IRS-approved vehicles that allows employees to set aside tax-exempt income for qualified medical expenses.
A person selects the amount to be withheld from their pay throughout the year up to a maximum of $2,500. The good news is that the entire amount is available the first of the year.
It is important to make sure that your planned spending is for covered expenses. To avoid end of the year rush spending, I recommend estimating on the conservative side for your withholding.
FSA funds must be used within the designated time frame or you lose the use of the remaining funds.
If your employer allows a grace period into the first quarter of the following year, you have the opportunity to combine funds from two years for expensive procedures or medical goods such as laser eye surgery or hearing aids.
Over the Counter Medications
As of 2010, over the counter (OTC) medications are no longer qualified uses for flexible spending account money. But there's a loophole.
If you get a prescription for a medication that can be brought over the counter, it is covered. Go ahead and ask your health care provider for a prescription for any regular OTC drug you use including pain relievers and allergy medication.
Health Savings Accounts
People with a high deductible health insurance policy can contribute to a health savings account (HSA).
For 2010 and 2011, the maximum contribution for a single person is $3,050 and a family is $6,150. Anyone age 55 or older can add an additional $1,000. You can withdraw funds as needed, but they must be for qualified health expenses or there is a penalty fee.
The good news is that HSAs roll over and continue to grow year after year (assuming you don't spend it all). Additionally, your contributions are tax exempt as well as any interest accumulated and they can be used tax-free for those medical expenses. It's win-win-win.
Seniors must stop HSA contributions once signed up for Medicare but can continue to spend their money tax-free until the account is emptied. The funds can be used for most Medicare premiums.
My family uses an FSA for non-covered medical expenses and I'm surprised how many of my co-workers don't take advantage of this tax-free money.
These tax breaks won't totally ease the pain of escalating health care costs, but every bit helps. Do you take advantage of any of these methods of saving on taxes?