Get ready and grab some coffee as we dive into income tax preparation for 2023-2024. In this example, we’ll use Lacerte tax software, but you don’t need it to follow along. However, tax software can be a great tool for running scenarios.
Taxpayer Profile: Adam, Single Filer
Adam, a resident of Beverly Hills (90210), is our starting point. He’s a single filer with two incomes totaling $100,000. With the standard deduction of $13,850, his taxable income stands at $86,150. Using tax software, we find his tax calculated at $14,266, as shown on page two of Form 1040.
Adjustments to Income: Line 10 on Schedule 1, Line 26
Now, let’s focus on adjustments to income, particularly the Health Savings Account (HSA) deduction, which we’ll find on Schedule 1.
Health Savings Account (HSA) Contributions
To contribute to an HSA, one typically needs a high deductible insurance plan. Contributions to an HSA can provide a tax benefit, similar to an IRA. The tax questions revolve around:
- Tax consequence upon contribution.
- Taxation as the money grows.
- Tax impact upon withdrawal.
Employer contributions to an HSA are often reflected on the W-2 form, making them easy to identify. However, contributions made by the individual may require adjustment to income.
Form 8889: Reporting HSA Contributions
Form 8889 details HSA contributions and distributions. Contributions made by the employer are already reflected in the W-2 and may reduce taxable income. Individual contributions, not reflected in the W-2, require deduction elsewhere, typically on Schedule 1.
Example: Maxing Out HSA Contribution
Let’s say Adam’s employer contributes $1,000 to his HSA. Adam decides to max out his contribution. For a single plan, the maximum contribution is $3,850. Subtracting the employer’s contribution, Adam can deduct the remaining amount on Schedule 1.
Family Plan Considerations
If Adam were on a family plan, the contribution limits would differ. In such cases, if the employer’s contribution doesn’t max out the limit, individuals may still contribute the difference.
Last-Minute Tax Planning
HSAs, like IRAs, offer last-minute tax planning opportunities. Contributions can be made until the tax filing deadline, providing flexibility for tax optimization.
Conclusion
Health Savings Accounts offer tax benefits for those with high deductible insurance plans. Contributions may be made by employers or individuals, with tax implications varying accordingly. Understanding HSA rules and contribution limits can aid in tax planning and optimization.