Episode 57: Tax Planning Strategies, Part 4: HSA’s and Understanding the QBI Deduction

Here are just a handful of the things that you’ll learn:

We understand tax planning is not a fun subject to talk about. Most of us just hand over a bunch of stuff to our accountants at tax time and let them figure it all out.  However, we firmly believe it’s important to have a basic understanding of this area so you can ask the right questions!


On our final podcast of this series on tax planning ideas, we will talk about HSA accounts and then we’ll discuss a provision in the TCJA called the QBI deduction, which can provide a generous tax break for businesses that qualify to claim it.


So far, we have talked about:


  1. the popular idea of Roth conversions on episode 54
  2. QCD’s on episode 55
  3. Bunching strategies and DAF on episode 56


Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to advise clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of these as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s just common sense.


(1:10) Practical planning segment: How Does a Health Savings Account Work?

We know what you are probably thinking: is there really another health insurance acronym I need to learn?


What Is An HSA? A health savings account (HSA) account is specifically created for health-related expenses.  Put simply, it is a way for you to SAVE funds for medical expenses at a later date. You might be saying, ‘sounds great! But what does it have to do with my taxes?’


Well, these are the best tax-advantaged accounts in the tax code because they are tax-deductible when funded, and tax-free when withdrawn! One of the great things about an HSA is that any unused funds you have rolled over from year to year, and these funds can be used for health-related expenses during retirement.


Let’s get into a few particulars of these accounts:


(4:15) Can I Open an HSA with Any Health Plan? To open an HSA, you must have a high deductible health plan (HDHP) that meets the following criteria for 2021:

For an individual plan:

$1,400 deductible (or higher)

$7,000 out-of-pocket maximum (or less)

For a family plan:

$2,800 deductible (or higher)

$14,000 out-of-pocket maximum (or less)


(6:20) Can I Contribute as Much to My HSA As I Want? Unfortunately, NO. The IRS sets some limits to how much you can save in your HSA. For 2021, these limits are increasing slightly:

$3,600 for an individual

$7,200 for a family


However, if you are 55 years or older, you are in luck! The IRS lets you add an extra $1,000 to these figures.


(8:20) What Can I Use My HSA Funds For? Funds in your HSA can only be used for “qualified medical expenses.” According to the IRS, medical expenses are defined as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body” and includes “the cost of equipment, supplies, and diagnostic devices needed for those purposes.”


Wondering what that means? It is just a fancy way of saying health-related expenses. This includes things like:

  • Doctor visits
  • Prescription Drugs
  • Medical supplies
  • Long-term care costs
  • Chiropractic services
  • Contact lenses
  • Lab tests
  • Dental treatment
  • Hearing aids
  • Psychiatric care


The entire list is extensive! Be sure to note that these expenses aren’t just medical, but also include dental and vision!


CAUTION:  Be careful about using your HSA funds for non-qualified expenses. If you do, you’ll end up paying income tax on the amount used, as well as a penalty tax (of 20 percent!!) for making a non-qualified withdrawal.


(10:40) Can I Use My HSA Funds on My Spouse and Kids? You can spend your HSA funds on three groups of people.

  1. Yourself and your spouse
  2. Any dependents you claim on your tax return
  3. Any person you could have claimed as a dependent on your tax return (with a few exceptions)


Interesting: Even if your spouse and children aren’t covered by the insurance plan associated with your HSA, you can still use your HSA funds to cover any of their qualified medical expenses.


(12:20) Now let’s switch gears a bit and talk about the QBI deduction. I warned you that this might get a little technical right?


The qualified business income deduction (QBI) is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income from their taxes.


In general, total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify. This is Section 199A of the code.


It allows owners of pass-through businesses to claim a tax deduction worth up to 20 percent of their qualified business income.

pass-through business is a sole proprietorship, partnership, LLC, or S corporation. The term “pass-through” comes from the way these entities are taxed.

Unlike a C corporation, which pays corporate federal income taxes, a pass-through entity’s business income “passes through” to the owner’s individual income tax return.

Qualified business income is the business’s net income, with a few exceptions. QBI doesn’t include:

  • investment income, such as capital gains or losses, dividends, or interest
  • income from businesses located outside of the U.S.

(15:40) Who qualifies for the QBI deduction? Pass-Through business only, but there are other restrictions.

SSTB: If your business is a “specified service trade or business” SSTB, your QBI deduction may be limited or disappear entirely once your total taxable income reaches a certain limit.

specified service trade or business (SSTB) is a service-based business (other than engineering or architecture) where the business depends on the reputation or skill of its employees or owners.

That’s a broad definition, but it includes law firms, medical practices, consulting firms, professional athletes, accountants, financial advisors, performers, investment managers, and more.

If you have a specified service trade or business you can determine whether you get the full 20 percent deduction, a limited deduction, or no deduction at all based on your total taxable income.

OK, so what’s the mean? When you’re a small business what determines taxable income

Total taxable income refers to all the taxpayer’s income before the QBI deduction is applied. This may include wages from other jobs, wages earned by your spouse (if married and filing a joint return), interest and dividends, capital gains, rental income, and more. For most taxpayers, this will be the adjusted gross income shown on Form 1040.

Bottom line: If all of this sounds confusing, it is. The QBI deduction provides a generous tax break for businesses that qualify to claim it. However, as the rules and definitions above make clear, determining who can claim the QBI deduction and calculating it is no easy task.

While it’s always a good idea for small business owners to read up on available deductions and get a good understanding of which tax breaks might apply to them, when it comes to calculating the QBI deduction, you may want to leave that to your accountant.


Final Disclaimer:


“We appreciate you joining us today for this episode of The Fiscal Blueprint.

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Remember it’s not about the money but about your life!

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Montgomery Financial Services- Retirement Planning, Financial Advisor, Holistic Financial Planning- Lewes, Delaware ~ Berlin, Maryland ~ Eldersburg, Maryland