I used my HSA to Reduce my 2008 TAX liability
It is tax season. For some of us the work is done, our taxes filed, and the refund is already in our checkbook. For others it is a chore we dread and put off until the last moment. I could not procrastinate this year, I have a senior with plans for college in the fall. That meant completing taxes and the FAFSA before March.
During 2008, I chose a high-deductible health plan and opened a Health Savings Account (HSA) at my credit union (Finance Center Federal Credit Union).
While preparing my taxes I found that, post-tax contributions to HSAs are tax deductible, like IRA contributions. I computed the difference between the Maximum allowed HSA contribution ($5,800.00 family plan) and the amount of contributions made during 2008. In my case, all of these dollars were pre-tax payroll deductions (reported on my W-2 - box 12 code W). So, this is what I could still add to my HSA for 2008 as a post-tax contribution. Not only that but I have until April 15th to make this contribution for the prior year to my HSA.
Good News! Since this difference was smaller than my expected tax refund, I can put this portion of my tax refund into my HSA, add the dollar amount to Form 8889, which carries to page one of my 1040 and further reduces my AGI (Adjusted Gross Income). That means I will owe less in taxes and get back an even larger refund.
Because the HSA contribution lowers your AGI and increases your refund, this technique can still work even if the original difference computation is not smaller than the expected refund. In some circumstances, the refund increase is sufficient to fund the entire contribution.
A similar strategy can be used with traditional IRA contributions. Be sure you have sufficient cash flow to fund these contribution before April 15th. If you file your taxes soon enough the IRS refund can be the source of the cash flow.