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My understanding is that medical insurance premiums are not valid expenses for an HSA - but that they are deductible if you deduct your medical expenses - at least the part above 7.5% of income.

Given this, and that HSA contributions are capped per year, and a lot of out-of-pocket expenses...

For nice round numbers, suppose:

  • Income = $100,000

  • Insurance Premiums = $7,500 (paid through the individual marketplace so it's not pre-tax like an employer plan would be)

  • Other Medical Expenses = $20,000

If I understand things, if I just straight deduct everything above the 7.5%, then I can deduct that whole $20,000 this year - I wouldn't be able to deduct the $7,500 because that covers the first 7.5% of income.

But if I use my HSA, then I can contribute, immediately reimburse myself, and deduct just $6,900 this year, then another $6,900 next year, and the balance the following year, only up to that $20,000 anyway, meaning it'll take years and years before I catch up.

Is that all true, and am I missing something? Given this, it seems a much better deal to just take the deduction and get the tax benefit right now rather than use my HSA and stretch things out for years.

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  • Are you self-employed?
    – Hart CO
    Commented Oct 11, 2018 at 16:51
  • @HartCO Not self-employed, but the marketplace plan, even full-price and even without the pre-tax benefit, was still considerably cheaper than my employer plan. My employer doesn't subsidize their plans at all like most do - if I remember, they wanted about $1600 per month compared to the $1000 or so that I'm paying through the marketplace.
    – Joe Enos
    Commented Oct 11, 2018 at 17:00
  • Ah bummer, if self-employed you could both deduct the insurance and use the HSA.
    – Hart CO
    Commented Oct 11, 2018 at 17:02

2 Answers 2

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In general, my understanding matches yours: you're better off just deducting the whole thing, if you are itemizing anyway.

The point of an HSA is not to help you deduct your current medical expenses. Rather, it's to encourage people to save for future medical expenses, and allows them to deduct that income while saving.

Now, one caveat does apply here: are you itemizing anyway? If not, it's possible that you'd be better off using the HSA (which does not require you to itemize). This depends on exactly what else is going on for you - do you have a mortgage, various local taxes (to the extent that they're still deductible), etc.

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  • That's a great point, thanks. I own a house, so I'm assuming I'll itemize like I always do, but with the massive changes to the standard deduction this year, I'll have to run some numbers to confirm that.
    – Joe Enos
    Commented Oct 11, 2018 at 16:12
  • @JoeEnos I can say that I for one will certainly not be deducting, despite owning a house, as you forgo over $20k in deductions now rather than the much smaller amount in previous years. Admittedly I do own a house with a great low interest rate mortgage, but still. Definitely look into it!
    – Joe
    Commented Oct 11, 2018 at 16:36
  • @Joe Not sure I follow your reasoning. It's no different than any other year, is it? If your itemized deductions exceed the standard deduction, then itemize. If not, don't.
    – chepner
    Commented Oct 11, 2018 at 16:44
  • @chepner The itemization decision is easy as ever, just far fewer people will be doing so. The HSA vs itemized deduction part is different, because if it takes a portion of the medical expenses to justify itemizing, you'd be better off not itemizing and using the HSA instead.
    – Hart CO
    Commented Oct 11, 2018 at 16:55
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    Right, that's the reasoning I've been using (although with the cap on state/local taxes rather than medical expenses pushing me towards the standard deduction this year.) I was just confused by the wording "forgo over $20k in deductions", as you aren't losing anything; you simply take the maximum of the itemized or standard deduction as always.
    – chepner
    Commented Oct 11, 2018 at 16:59
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The only caveat I can think of is that an HSA can be invested and the capital gains aren't taxed, but you'd have to run the numbers to see if that made sense.

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