Tax Attic: The HSA model will be refined going forward into 2017


Welcome to the 2017 tax filing season. It’s going to be a great one! It hardly seems possible that my tax preparation career started back in 1978. It will be 40 years next year since I got Deb’s agreement that I could take an income tax course at a tax office near our house close to Creston High School in Grand Rapids. That tax course changed the direction of our lives. I became involved in the income tax preparation business and have been at it ever since. The changes in the tax business since that first year are immense. For starters, we had neither computers nor software. Returns were all prepared by hand with a pencil. The paper we used was about two pound, very thin, compared to the standard 20 pound that we use today, so it could be easily copied. The main mistakes made in those pre-software days were mathematical in nature as opposed to theory mistakes. Mis-adding $457.84 plus $879.72 or writing down 81 instead of the real figure, 18, was a distinct and real possibility. The statement that all of us are dyslexic to some extent really is true. We double and triple checked our entries and every return was then double checked again. Overall, it seems that returns were a little less complicated back then. The phase-in and phase-out rules that ramped up the difficulty scale tremendously didn’t become really popular until the 1990’s. Congress went entire sessions without passing a major tax law. Today, they can hardly go two months without creating a new major tax bill. Those tax laws just roll out of Washington D.C. like water off a duck. For many years, we were able to use the less than 300 page, IRS Publication 17 as our main reference book. It seems that every income item, deduction, and credit available today has a quirk to it. My office now uses a slightly less than 1,000 page reference manual called, ‘ The Tax Book’, to look up many questions. Tougher questions are researched on-line through our tax software. For the toughest questions, we call an independent, third-party, research company. We depend on the software to keep the math perfect while we are concerned with getting the theory correct. I can hardly wait to see what happens in the next few years in general and four years in particular.


Last week, I discussed Health Savings Accounts (HSAs) and gave some of the basic rules. This week, let’s discuss HSAs further. Let’s review the reasons that the HSA is fast becoming the account of choice for health insurance. First, an HSA allows the account holder to save money to pay for every day medical expenses on a tax deductible and tax-free basis. Many employees are covered by an employer maintained policy that usually allows the premiums to be paid for on a pre-tax basis. However, if the employer doesn’t provide insurance as a benefit, without the HSA, the taxpayer is usually able to get a deduction for neither the expenses nor the premiums paid. Second, the HSA account is owned by the taxpayer and is not tied to an employer. It is completely portable. In today’s work environment, having insurance that a person can take without being dependent on an employer can be very important. More and more taxpayers want the ability to change jobs without having health insurance being the deciding factor. HSAs provide that option. Third, once the owner turns 65 and signs up for Medicare, taxpayers can no longer make contributions to the HSA. However, the HSA amounts accumulated in the account can be withdrawn for any reason, not just for medical expenses. The amount is taxable but there is no penalty. In effect, the HSA becomes another retirement account. Fourth, HSAs have a rule called the last month rule. A taxpayer who is eligible on the first day of the last month of the taxpayer’s year, usually December 1, is able to make a full year’s worth of contribution as if he was covered for the entire year. Finally, an employer can make income tax-free and employment tax-free contributions to the HSA for an employee. The employee can then make further contributions up to the contribution limits. All in all, it looks like the HSA model will be refined going forward and will be with us for maybe another 40 years. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at