Evan participates in an HSA carrying family coverage for himself, his spouse, and two children. In 2019, Evan has $100 per month deducted from his paycheck and contributed to the HSA. In addition, Evan makes a one-time contribution of $2,000 on April 15, 2020 when he files his tax return. Evan also receives a 2019 Form 1099-SA that reports distributions to Evan of $3,200 which Evan used for medical expenses. Compute the effect of the HSA transactions on Evan’s adjusted gross income.

Answer and Explanation:

Contributions to a health savings account (HSA) can be made by or on behalf of (for example, by a family member) any eligible individual and are deductible by the eligible individual "above the line" in arriving at adjusted gross income (AGI). Thus, eligible individuals can benefit regardless of whether they itemize deductions. However, the individual cannot also deduct the contributions as a medical expense , and the deduction will not reduce a self-employed person's self-employment tax. Also, contributions can be made by or on behalf of an eligible individual even if the individual has no compensation or if the contributions exceed his or her compensation.

The maximum annual contribution to an HSA is the sum of the limits determined separately for each month, based on status, eligibility, and health plan coverage as of the first day of the month.

Health Savings Accounts (HSAs) are a way that people can pay for unreimbursed medical expenses such as deductibles, co-payments, and services not covered by insurance. Eligible individuals can establish and fund these accounts only when they have a qualifying high-deductible health plan (HDHP). This means insurance with a deductible of at least $1,350 for individual coverage and $2,700 for family coverage (2020 figures) and no other health plan to draw on, although there are some exceptions.

There are also tax advantages that can be substantial for some people: 1) contributions are deductible (or excluded from income that is taxable if made by an employer); 2) withdrawals are not taxed if used for medical expenses; 3) earnings on the savings account earnings are tax-exempt; 4) unspent balances may accumulate without a maximum limit.

Two types of contributions may be made to HSAs: regular and catch-up. The annual contribution limit for an HSA for individual coverage is $3,500 in 2019. The annual limit for family coverage is $7,000. For individuals between 55 and 64, additional "catch-up" contributions to an HSA are allowed—$1,000 in 2020. The maximum contribution limits will be adjusted for inflation in future years, rounded to the nearest $50.

Individuals who contribute to HSAs may claim a deduction on their federal income tax return. It is an "above the line" deduction, which means that the deduction for HSA contributions is used in determining adjusted gross income (AGI). Thus, it may be taken by all eligible taxpayers, whether they itemize deductions or take the standard deduction. Contributions made by employers are excluded from gross income of employees in determining their income tax liability. Withdrawals from HSAs are exempt from federal income taxes if used for qualified medical expenses. Those dollars not used for qualified medical expenses are included in gross income on your federal income tax form and are also subject to a 20% penalty tax. The penalty is waived in cases of disability or death and for individuals age 65 and older. After age 65, the money can be used without penalty for non-medical purposes.

As per the above discussion one can note that the entire contribution made by Evan shall help in reduction of the AGI for the federal taxes. Hence the AGI of evan shall decrease by 3200.

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