12 Apr Tax treatment of Health Savings Accounts

Q. Are contributions to Health Savings Accounts (HSAs) deductible for New Jersey tax returns or just for federal returns?
— Looking for savings

A. Health Savings Accounts are a great way to cover your medical expenses.

HSA contributions through payroll deductions are made on a pre-tax basis.

These contributions would not be deductible on your tax return because you have already received the benefit through your pay, said Laurie Wolfe, a certified public accountant with Lassus Wherley in New Providence.

But if you make a deposit directly into an HSA account from your own bank account, you would take an “above the line” deduction for the amount contributed, she said.

“`Above the line’ deductions are deductions taken in the Adjusted Gross Income section of the tax return,” Wolfe said. “In this way, you escape the limitations that apply to itemized deductions.”

Wolfe said the total amount that you can put into an HSA, whether through your pay or directly, is limited to $3,400 for single persons and $6,750 for a family.

And you are correct: New Jersey does not allow tax-deferred contributions to HSAs.

“You can deduct from New Jersey gross income the medical expenses that you paid for that were not reimbursed by your insurance,” Wolfe said. “You would include any expenses that were reimbursed by your HSA because you did not receive a benefit when you put the money into the HSA.”

So, she said, New Jersey looks at your actual medical expenses, not your contribution to the savings account.

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This post was initially published in April 2017.