Tax Implications of Health Savings Accounts (HSAs) and Premium Tax Credits (PTCs)

Healthcare costs in the U.S. can be burdensome, but Health Savings Accounts (HSAs) and Premium Tax Credits (PTCs) provide valuable financial support. HSAs allow individuals to save for qualified medical expenses with significant tax advantages, while PTCs help make health insurance more affordable for eligible individuals and families.

Health Savings Accounts (HSAs)

HSAs are designed for individuals enrolled in high-deductible health plans (HDHPs). To qualify, the HDHP must have a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage in 2024. Individuals enrolled in Medicare or claimed as dependents are not eligible.

HSAs offer the following tax benefit:

  • Contributions reduce taxable income.
  • Earnings grow tax-free.
  • Withdrawals for qualified medical expenses are tax-free.

In 2024, contribution limits are $4,150 for self-only coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for those aged 55 and older. Once enrolled in Medicare, individuals can no longer contribute but can use existing funds tax-free for eligible expenses.

HSA holders must report contributions and withdrawals on Form 8889 to ensure compliance and avoid penalties.

Premium Tax Credits (PTCs)

Premium Tax Credits (PTCs), part of the Affordable Care Act (ACA), help low-to-moderate-income individuals afford health insurance purchased through the federal exchange (i.e. Healthcare Marketplace). To qualify for the PTC, taxpayers must be U.S. citizens or legal residents who purchase health insurance through the Healthcare Marketplace. They must not be claimed as dependents on anyone else’s tax return, and their household income generally needs to be between 100% and 400% of the Federal Poverty Level. If married, the couple must file a joint tax return.

There are two ways to receive the Premium Tax Credit:

  1. Advance Premium Tax Credit (APTC): APTC that consumers receive is determined by their estimated annual household income. If the taxpayer qualifies, they can opt to have the credit amounts paid directly to their insurance provider, which helps reduce their monthly insurance premiums.
  2. Refundable Credit: Alternatively, the taxpayer can pay the full price for their insurance through the Marketplace and then claim the Premium Tax Credit as a refundable credit when filing their individual tax return.

If taxpayers underestimate their annual income and receive more APTC than they are eligible for, they will need to repay all or part of the excess credit when filing their federal tax return for that year. The repayment caps range from $400 to $3,150, depending on the taxpayer’s income and filing status. Thus, Form 8962 is required if you are claiming the PTCs, whether through advance payments or directly on your tax return, and to reconcile any changes in your eligibility throughout the year.

Conclusion

Both HSAs and PTCs are effective tools for managing healthcare costs and enhancing tax efficiency. HSAs provide substantial tax benefits and flexibility for current and future medical expenses, while PTCs make health insurance more accessible for those with lower incomes. Understanding eligibility requirements, reporting obligations, and potential consequences is crucial for maximizing tax benefits.

 

Disclaimer: This information has been prepared for informational purposes only, and is not

intended to provide, and should not be relied on for, tax, legal or accounting advice. Expats should consult with tax professionals to optimize their tax planning, ensure compliance with updated international rules, and take advantage of enhanced credits and deductions.

 

Key References

IRS Publication 969 – Health Savings Accounts:

https://www.irs.gov/publications/p969

 

IRS Form 8889 – HSA Reporting:

https://www.irs.gov/forms-pubs/about-form-8889

 

IRS Publication 502 – Qualified Medical Expenses:
https://www.irs.gov/publications/p502

 

https://www.nerdwallet.com/article/taxes/premium-tax-credit

 

https://www.taxandaccounting.com/post/what-are-the-tax-considerations-for-health-savings-accounts-hsas

 

IRS Publication 974 – Premium Tax Credit (PTC):
https://www.irs.gov/publications/p974

 

Form 8962 – Premium Tax Credit:
https://www.irs.gov/forms-pubs/about-form-8962

 

HealthCare.gov – Understanding the PTC:
https://www.healthcare.gov/glossary/premium-tax-credit/