MEDICAL SAVINGS ACCOUNTS

AN IDAHO INCOME TAX DEDUCTION*
The 1995 Idaho Legislature passed a law creating Medical Savings Accounts (MSAs). This law allows you to save for medical expenses and nursing home costs while reducing the amount of Idaho income tax you owe.*

You can establish an MSA at any participating financial institution in Idaho. This account is used to pay eligible medical, vision and dental expenses (as defined by the Internal revenue Code), as well as health insurance premiums, supplemental Medicare premiums and long-term care.

Contributions to an MSA may be deducted from your federal adjusted gross income when you file an Idaho income tax return. At the time of this writing, you may deduct up to $2,000 of the amount you contribute each year. If you are married and file a joint tax return, you may deduct up to $4,000 of the amount contributed. Interest earned on your account is also deductible. These deductions can be taken only on your Idaho income tax returns; they do not apply to federal returns.*

You must pay tax on any funds you withdraw from the account to pay for something other than eligible medical expenses. Also, if you are less than 59 ½ years of age, funds withdrawn to pay for something other than eligible medical expenses are subject to a 10% penalty.

Here are some commonly asked questions about the program:

Q: Can a married couple establish an MSA in both names, or must each person have a separate account?

A: Either way is allowed.

Q: Do eligible medical expenses include vision care or glasses?

A: Yes.

Q: May I deduct money from my MSA to pay the expenses of living in a nursing home?

A: Yes, you may withdraw money from your MSA to pay for care in a skilled nursing facility or intermediate care facility. You may also reimburse yourself for premiums paid for long-term care insurance.

Q: Is transportation to and from a medical appointment an eligible expense?

A: Yes. You may base the amount either on your actual cost for gas, oil and parking or the optional standard medical mileage rate as defined by the Internal Revenue Code annually.

Q: If I pay eligible medical expenses from my account, are the expenses still deductible on Schedule A?

A: Yes. Your Schedule A does not have to be reduced by any amount of eligible medical expenses paid from an MSA. If you claim medical expenses on the federal Schedule A, the same amount is included if you itemize for Idaho.

Q: If I withdraw money to pay my child's medical expenses, must that child be my dependent from the withdrawal to remain exempt from tax?

A: Generally, yes. However, you can pay the expenses for a child or grandchild if (1) the child is under 19 years of age or enrolled as a full-time student at an accredited college or university; (2) the child is not self-supporting, married or a member of the armed forces; or (3) the child is mentally or physically unable to be self-sufficient.

Q: If my employer contributes to the medical savings account, must I report that amount as income before I can deduct it?

A: Yes. The amount should be included in your W-2 form as taxable wages.

Q: May I withdraw (tax free) from my MSA the health care premium my employer has deducted from my paycheck?

A: If the amount withheld from your paycheck for payment of health insurance premiums is included in taxable income on your W-2 form, you may withdraw funds from your MSA account to reimburse yourself.

Q: Can hospitals and doctors offer medical savings accounts?

A: No. But the law allows state-regulated hospital and professional service corporations, such as Blue Cross/Blue Shield, to become depositories. The law also permits brokerage firms to offer medical savings accounts.

Q: May I make contributions to my account at any time during the year and for any amount?

A: Yes. However, you can only deduct $2,000 form your income ($4,000 if you file a joint return). The contribution must be made before the end of the calendar year.

Q: Can I wait until an expense occurs before depositing money into my account?

A: Yes. However, the money must be in the MSA before you pay the expense. Example: You go to the doctor today and he gives you a bill for $500. Tomorrow you deposit $200 into your MSA. At the end of the month you pay your doctor $500. The middle of next month you deposit $300 more into your MSA. You may only reimburse yourself $200 because that was the amount in the account when you paid the bill.+

*Please consult with a tax advisor for questions and information regarding taxes and to determine if you would benefit from tax savings. The information above is for informational purposes only and should not be construed as tax advice.