Deductions are the expenses that are subtracted from gross income, reducing taxpayer’s tax liability. They are two classifications of deductions; adjustments for income and deductions from adjusted gross income (AGI). One of the deductions made to reach the AGI is the Healthcare savings account (HAS) deductions.
A healthcare saving account (HSA) as an adjustment
HSA is an account where individuals and employers deposit money directly for people registered with a high deductible health plan. Funds deposited into the HSA are not subjected to federal income tax hence tax-advantaged accounts. HSA is deducted directly from gross income (Alt, Preston, & Sibieta, 2010) .
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How HSA works
HSAs are available to persons or families registered with a high-deductible health plan. According to Hoffman, Maloney. Raabe, & Young, (2014) , a high-deductible policy established plans with deductibles above 2,500 dollars for families and 1,250 dollars for single entities. However, the maximum is 12,700 dollars for families and 6,350 dollars for individuals.
Reason for using HSA as an adjustment by the congress
Congress allows adjustments to income for HSAs to encourage individuals to make better-informed decisions about healthcare needs. HSAs avail high deductible health plans (HDHP), which are with tax exempted saving accounts ( Weltman, 2017).
Why is HSA an adjustment rather than a deduction from AGI?
The HSAs should be an adjustment rather than a deduction from AGI because changes help to reduce the tax liability of taxpayers by reducing AGI. The AGI availed to the Tax return systems assist in determining the below lines of the AGI; hence the determination of modified adjusted gross income (MAGI). The HSAs deductions help in encouraging many individuals to enroll in health care saving plans.
Effect of changing HSA into deduction from AGI
Switching HSAs into deductions from AGI will affect the AGI and consequently affecting the taxable income of the individual. Besides, this will discourage patients from participating in Health care saving plans since the tax code will not be favorable to the participants of the health care plans.
Importance of AGI in tax liability determination
AGI directly determines the various deductions and credits an individual may claim from tax return hence influencing the tax liability of the taxpayer. In this case, the lower the AGI, the higher the deductions and credits the individual is eligible to receive, therefore, decreased tax.
Conclusion
The adjustments are essential to taxpayers because they give the individuals the chance to choose different deductions and credits availed by lowering the AGI. The adjusted gross income directs the tax return systems in determining the modified adjusted gross income that is crucial in tax calculation.
References
Alt, J., Preston, I., & Sibieta, L. (2010). The political economy of tax policy. Institute of Fiscal Studies (Hrsg.), Dimensions of Tax Design: The Mirrlees Review, Oxford (im Erscheinen) .
Hoffman, W. H., Maloney, D. M., Raabe, W. A., & Young, J. C. (2014). South-Western Federal Taxation 2015: Comprehensive . Nelson Education.
Weltman, B. (2017). JK Lasser's 1001 Deductions and Tax Breaks 2018: Your Complete Guide to Everything Deductible . John Wiley & Sons.
