By MARSHA A. GOETTING, Ph.D., CFP®
Have you had any medical expenses so far this year that haven’t been covered by your health insurance policy or a flexible spending account (FSA)?
If you said yes, did you know you can open a Montana Medical Care Savings Account (MSA) by Dec. 31 to cover those expenses and save state income taxes? If you establish an MSA and deposit up to $3,500, (the maximum in 2018) that amount is used to reduce your 2018 Montana adjusted gross income, thus reducing your state taxes.
This tax advantage does not apply to your federal income taxes and should not be confused with the Federal Health Savings Accounts (HSAs) or Federal Flexible Spending Plans (FSAs). You do not have to be in a high deductible health insurance plan to be eligible for an MSA. Unlike an HSA, you can be age 65 and over and still be eligible for an MSA.
Any unused money deposited in your MSA during the year it was deposited. It remains in the account and earns interest that is free from Montana income taxation. That money in the MSA can then be used for eligible medical care expenses in future years.
If you have taxable income over $17,900, you could save about $242 in state income taxes by depositing the maximum $3,500 in a Montana MSA during 2018. Individuals may contact their financial institution, such as a bank, savings bank, or credit union, to establish an MSAI.
If you have already paid your 2018 medical bills either by check, cash, or credit/debit card, you can add up those eligible expenses, make a deposit by December 31, and reimburse yourself from the MSA account on the same day for eligible expenses paid January through December.
The key word is paid. You can reimburse yourself for paid eligible medical expenses by the end of the year. But if you haven’t yet paid those bills because your health insurance company hasn’t sorted out what it will pay and what you still owe, you still can reimburse yourself for those unpaid 2018 eligible expenses during 2019.
The amount you can use to reduce your Montana income is the total deposited, not the amount used for medical expenses during the tax year. For example, if you deposited $3,500 in an MSA but only used $500 for eligible medical expenses during 2018, you still get to reduce your income by $3,500. The remaining $3,000 is available for paying medical expenses in future years.
A husband and wife who each establish an individual MSA can receive a $7,000 reduction in income. They will save about $484 on their state income taxes. Joint tenancy accounts for an MSA are not allowed. Only individual accounts are eligible for the Montana MSA deduction. Thus, husbands and wives must open separate MSA accounts.
MSA amounts held in the name of a husband or wife can be used to pay the medical bills of either spouse or their dependent children, or anyone. For example, if a husband had $7,000 in medical expenses during 2018, $3,500 from his own MSA and $3,500 from his wife’s MSA could be used to pay his eligible medical bills.
Eligible expenses include medical and dental insurance premiums, long-term care insurance, dental care, eyeglasses or contacts, or prescription drugs that are paid during the year. Not covered are medical-related bills that have been already covered by a supplemental, a primary or a self-insured plan. Basically, Montana accepts as eligible expenses any that are listed in the IRS 502 Publication, “Medical and Dental Expenses,” which is on the Web at www.irs.gov/pub/irs-pdf/p502.pdf.
What happens to your MSA if you die? Check to be sure you have placed a payable on death designation (POD) on your MSA account. Parents of the deceased account holder, a surviving spouse, and lineal descendants can transfer the inherited MSA into their own MSAs. This means the transfer is not subject to income taxation to the deceased person, spouse, parents, or any lineal descendants. Stepchildren are considered lineal descendants if that relationship was created before the child’s eighteenth birthday.
An MSU Extension MontGuide will help you decide if you would benefit from a Montana medical care savings account. The publication (MontGuide 199817 HR) is free at your local MSU County or Reservation Extension office. You may also download it free from the web.
Marsha A. Goetting, is the MSU Extension Family Economics Specialist. She may be reached at firstname.lastname@example.org.