Academic journal article Journal of Accountancy

Ineligible MSAs

Academic journal article Journal of Accountancy

Ineligible MSAs

Article excerpt

Before 1997, individuals could deduct the cost of health insurance only if they itemized and their total medical expenses exceeded 7 1/2% of adjusted gross income. In addition, self-employed individuals were allowed to deduct only 30% of the cost of their health insurance premiums for themselves and their immediate family members right off the top as a deduction for adjusted gross income. The remaining premiums were subject to the same 7 1/2% limitation.

Now, under a pilot program that began on January 1, 1997, certain self-employed individuals and employees of small businesses who are covered by "high-deductible" health plans are eligible to establish medical savings accounts (MSAs). Subject to limitations, amounts contributed to an MSA are deductible directly from gross income. Employer contributions to an MSA on behalf of an employee are excluded from the employee's income, and the earnings generated by an MSA and distributions received from an MSA to pay for the taxpayer's or the taxpayer's family's unreimbursed medical expenses are not subject to tax.

To receive these MSA benefits, Internal Revenue Code section 220(c) (2)(A) requires that a taxpayer invest in a high-deductible health plan with an annual deductible of a least $1,500 and not more than $2,250 for individual coverage and at least $3,000 and not more than $4,500 for family coverage. …

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