2021 Changes to Tax Provisions Related to Health Care Costs by Adam Cohen, CPA
Posted on January 13, 2021
by
Adam Cohen
The COVID-19 pandemic and long-awaited rollout of FDA-approved vaccines this year highlight the importance of planning for rising medical costs and taking advantage of tax breaks, when available, to help you cover some of those expenses. Following are the IRS’s annual cost-of-living adjustments for various provisions of the tax code that relate to health care costs in 2021.
Health Savings Accounts (HSAs)
High deductible health plans (HDHPs) provide an affordable option for individuals to receive health insurance coverage. However, in exchange for lower annual premiums, these plans require participants to pay more out-of-pocket costs for medical care before deductibles are reached and insurance kicks in.
HDHP participants can cover these out-of-pocket costs by establishing and funding health savings accounts (HSAs) that offer the following benefits:
- Contributions by account owners and employers are fully deductible, up to the legal limit.
- Withdrawals to pay for qualifying medical expenses are tax-free.
- Interest earned on savings is tax-free when money is used to pay for qualified medical expenses.
- Annual contributions roll over from year to year, meaning that you don’t lose what you don’t use.
For 2021, the definition of HDHPs with self-only coverage includes those plans with annual deductibles that are not less than $1,400 and with annual out-of-pocket expenses for covered benefits (excluding plan premiums) of less than $7,000. For family coverage, the annual deductible must be no less than $2,800 with a maximum out-of-pocket expense limit of $14,000.
The maximum amount an individual can contribute in 2021 to his or her HSA and receive a tax deduction is $3,600, or $7,200 for family coverage. An additional $1,000 in catch-up contributions are available for taxpayers age 55 and older.
Flexible Spending Accounts (FSAs)
Some businesses offer their employees access to medical flexible spending accounts (FSAs) that allow workers to set aside pre-tax dollars to pay for health care costs that are not covered by insurance. The maximum contribution limit to an FSA in 2021 remains at $2,750.
Unlike HSAs that permit owners to roll over unused account balances from one year to the next, FSAs generally limit this practice. However, in response to the COVID-19 pandemic, the IRS last year offered employers the opportunity to increase the amount of unused FSA dollars that individuals may carry over from one plan year to the next without penalty from $500 to $550. The latter amount applies to carryovers for 2021 as well.
Long-Term Care Insurance Premiums
Individuals who buy long-term care insurance (LTCI) to pay today for the rising costs of care during their later years may qualify to deduct a portion of their annual premiums as itemized medical expenses on their federal tax returns. The actual amount of the deduction is based on the policy owner’s age and whether his or her medical and dental expenses exceed 7.5 percent of his or her adjusted gross income (AGI). For example, a qualifying taxpayer age 41 through 50 may deduct up to $850 in 2021 LTCI premiums, whereas taxpayers age 61 through 70 may deduct as much as $4,520 this year. The amount of the deduction increases with the policy owner’s age.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency while complying with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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