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Key Takeaways
- Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can reduce out-of-pocket medical costs using pretax dollars.
- Medical expenses exceeding 7.5% of adjusted gross income may be tax-deductible, offering potential savings.
- Paying out of pocket for procedures allows HSA funds to grow and be used for future healthcare or retirement needs.
When preparing for a medical procedure, it’s natural to worry about how to cover the costs.
While health insurance may help, more expensive procedures, especially elective ones, can put a dent in your finances if you’re unprepared. Thankfully, with proper planning, an understanding of timing, the tax code, and even employee benefits, clients can use certain tools to soften the blow.
What I’m Telling My Clients
1. Review Your Workplace Benefits
Depending on the type of procedure, it may be eligible for reimbursement through a healthcare Flex Spending Account (FSA) or a Health Savings Account (HSA). Funded with pretax dollars, they reduce out-of-pocket medical expenses. And the list of eligible uses is expansive, ranging from copays and exam costs to over-the-counter medications and supplements from your local pharmacy.
2. Choose the Right Account for the Expense
FSA holders can roll over a minimal amount of unused funds from year to year, making them best suited for smaller expenses such as copays or costs incurred before meeting a deductible. HSAs offer more flexibility, making them especially valuable for larger or unexpected medical expenses.
3. Think Carefully Before Spending HSA Assets
Deciding how to pay for a procedure depends on your cash flow needs. For those short on money, withdrawing HSA funds provides a tax-free funding source that won’t increase their current expenses. If cash flow isn’t a concern, however, paying out of pocket is an attractive option for two reasons.
First, allowing HSA funds to continue to grow makes it more likely they can be used for healthcare expenses in retirement, when income may not be as plentiful, or for general expenses, as HSAs can be used for non-medical purposes after age 65.
Second, as long as the medical expenses were incurred after the HSA was established, owners can reimburse themselves at any time. This feature means that should cash flow become a concern at some point, even 20 years from now, the client can tap into the HSA for relief, with the added benefit of letting their funds continue to grow.
Note
Supplemental coverages like critical illness, cancer insurance, or hospital indemnity are typically low-cost and provide an added layer for major medical expenses.
4. Consider Whether Tax Planning Can Help
For pricier medical procedures, certain tax strategies may position them to deduct a portion of the expense. Medical expenses are tax-deductible to the extent they exceed 7.5% of adjusted gross income, and allowable expenses include costs from copays, insurance premiums, and even therapy in some cases.
If a medical procedure is on the horizon, “bunching” medical expenses into the same year can increase the likelihood of a tax deduction. This might mean moving up your child’s appointment to get braces before the end of the year, or scheduling a procedure for that nagging injury you’ve been managing that requires surgery.
If the procedural costs are limited to one person in a marriage and represent a large percentage of their income, a more advanced strategy would be filing separately, so a larger percentage of the costs would be deductible.
The Bottom Line
Determining how to pay for a medical procedure can be daunting. Navigating insurance, choosing the best funding source to cover the expense, and even understanding its potential tax impact require knowledge and proper planning.
But for those who approach the process with a strategy in place, the cost of the procedure can be reduced.
Read the original article on Investopedia
