Any tax advantages to moving money from a checking account to an HSA before paying medical bills?

[simmonstyle]

Is there any tax advantage to moving claim reimbursement money from a personal checking account to a HSA account before paying medical bills?

[Critter]

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[Opus 17 · Accepted solution]

I'm confused by your question because the whole reason for the existence of an HSA is to pay for expenses with tax-free money.  

Money that your employer contributes for you is a tax-free employee benefit, of course.

But any money you put in the account is also tax-free.  If you contribute via payroll deduction, that money is taken out of your check before taxes are computed.  For the average person, contributing $100 per month into the account reduces their take home pay by about $70.  You are saving around 30% in taxes right up front in your weekly paycheck.

If, instead of making payroll contributions, you make a lump sum payment from your after-tax take-home pay, you get a tax deduction for that at the end of the year.  For every $100 you put in, you get about $15-$25 extra in your refund.  (Payroll contributions are 7% better than making after tax deposits since you also save on social security tax.)

So if you have the cash to pay the bill, but you qualify for an HSA and you are under your annual limit, then depositing the money in the account for one day and taking it out the next day to pay the bill will get you a 15%-30% tax savings, depending on your marginal rate and your state income tax.

Note there are strict eligibility requirements and annual contribution limits, and stiff penalties for contributing too much or contribution when you are not eligible.  Start here for more,

https://ttlc.intuit.com/questions/1899728-what-is-a-health-savings-account-hsa

[SweetieJean]

"claim reimbursement money" Do you mean money that was already reimbursed from some other source, such as health insurance?  You cannot double dip.

[summest]

It sounds like he means there isn't enough money in the HSA from payroll deductions to cover the medical bills he has.  That is my situation too.  If I add to the HSA balance from my after-tax checking account funds it sounds like I will get a deduction, if I itemize on my tax returns.  With the new higher standard deduction, if my itemized items are less than the standard deduction then I won't itemize and won't see any tax benefit from making an additional contribution to HSA from my checking account.  Is that right?

[VolvoGirl]

Yes.  But you still  get a deduction if you pay medical bills directly from your checking account (if you Itemize and don't take the Standard Deduction).  So there's no point in moving it to the HSA first.

[dmertz]

Even if you itemize rather than take the standard deduction, you only get a deduction for medical expenses in excess of 10% of AGI in 2019 and later years, so it's entirely possible that contributing to an HSA (if eligible) with money from a checking account, getting the deduction, then paying the expenses from the HSA will be advantageous over just paying the expenses directly from the checking account.

[BMcCalpin]

@summestfirst I would recommend creating a new post whenever you want to ask a question, even if your question is related to an existing post. It's easier for others to see and answer your particular question this way.

As for your question, as the others have pointed out, the mechanism of getting a tax benefit from an HSA is different from getting a tax benefit from the medical and dental expense deduction on Schedule A. That is, your statement: "If I add to the HSA balance from my after-tax checking account funds it sounds like I will get a deduction, if I itemize on my tax returns" is not accurate.

Why? Because valid HSA contributions are either removed from your Wages (Boxes 1, 3, and 5) on your W-2 (so you don't pay tax on them), or are deducted from your income "above the line" on line 25 on Schedule 1 (form 1040) (so again, you don't pay tax on them). These two possibilities exist without regard to whether you take the Standard Deduction or itemize on Schedule A.

So you always want to pass your after-tax money from your checking account through the HSA, so that you can get the tax benefit (assuming that you don't exceed your annual HSA contribution limit).

It may happen (I can't tell from your post), that you have more medical bills at the moment than you have money in the HSA. In that case, pay the excess bills with your after-tax money, then, when the money is later added to the HSA, you can contact the HSA custodian and ask to be "reimbursed" for the medical bills that you have already paid with after-tax money. The HSA custodian will send you a check for that amount. Note that it is up to you to keep the paperwork for the bills and the request for reimbursement in case of an audit.

You can ask for reimbursements for any qualified medical expense that was incurred AFTER you started your HSA (normally when you made the first contribution). Yes, this means that if you have maxed out HSA contributions for this tax year, but will make more contributions next year, then next year at some point when the money is in your HSA, you can request reimbursement for medical bills paid with after-tax dollars, even though they were incurred this year. That is, the rules on when you can reimburse medical bills with HSA funds are not the same as when you can deduct medical bills on Schedule A.

As you rightly suspect, the increased Standard Deduction has sharply reduced the usefulness of the medical and dental expense deduction on Schedule A, which, frankly, was not very useful anyway for most taxpayers. But since the HSA tax benefit (the total dollars contributed to the HSA are not subject to federal income tax, not just whatever is greater than 7.5% or 10% of your AGI) is totally independent of Schedule A, it works out to be a much better tax benefit than Schedule A ever was.