The best way to determine what medical expenses to deduct tax-free from a Health Savings Account is to follow the guidelines in IRS Publication 502, "Medical Expense Deductions," and IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans." Every medical expense that qualifies as a deduction can be paid for with a tax-free distribution from an HSA. But there also are some things you can deduct from an HSA that are not normally tax-deductible -- or even payable through a Flexible Spending Arrangement.
Insurance Premiums
You can pay premiums for qualified long-term care insurance with an HSA. And you can use HSA funds to pay for COBRA continuation coverage and for any health insurance while you are getting federal or state unemployment benefits. You also can use your HSA to pay for your share of health benefits from a former employer available to you as a retired person. Distributions to pay for long-term care payments have annual caps. For 2009, the latest full tax year: up to $320 for persons under age 40; $600 if you're 41 to 50; $1,190 between 51 and 60; $3,180 from 61 to 70 and $3,980 if you're 71 or older.
Medicare
Because HSA accounts are use it or save it, you might qualify for Medicare while you still have a sizable amount in your HSA. You can use that money to pay any premiums for Medicare Part B, doctor and out-patient services; Part C, the Medicare Advantage HMO and PPO plans; and Part D, prescription drug coverage. You also can use HSA funds for any co-pays or deductibles associated with Medicare plans, including Part A, hospitalization coverage. However, you cannot use HSA funds to pay for Medicare supplementary, or Medigap, policies. One strategy: Use your tax-free HSA funds to pay your Part B and Part D premiums rather than having it deducted from your Social Security payment. Then use the extra Social Security money for Medigap coverage.
Over-the-Counter Drugs
All deductible prescription drugs can be paid for with HSA funds, but you also can use HSA money to buy aspirin, cold remedies, allergy pills and other over-the-counter drugs used to treat or prevent a medical condition. You can even pay for toothpaste from your HSA account.
Alternative Medicine
Treatments often disqualified by health insurance companies, such as acupuncture, chiropractic care, herbal medicine and homeopathic treatments, can be paid for with HSA distributions.
Warning
Use IRS Publications 969 and 502 (See Resources) as your final authority on what you can pay for with HSA money. If you take out money for an unqualified medical expense -- such as cosmetic surgery, unapproved imported drugs or self-prescribed nicotine patches -- the distribution will be regarded as taxable income, plus you will be subject to a 10 percent penalty.
Tags: Health Savings, paid with, from your, health insurance, Health Savings Account, long-term care, medical expense
