An Idaho Medical Savings Account (MSA) allows you to save for medical expenses and long-term care costs while reducing the amount of Idaho individual income tax that you owe.
Contributions to a federal MSA or health savings account (HSA) don’t qualify for this Idaho deduction.
Qualifying accounts and expenses
For your account to qualify as an MSA, the financial institution must include the words “Medical Savings Account” or the letters “MSA” on your statement as well as in the name, title, description, or designation of the account.
You can use this account to pay only eligible medical, vision, and dental expenses (as defined by the Internal Revenue Code), along with health insurance and supplemental Medicare premiums and long-term care expenses.
In addition, transportation to and from a medical appointment is an eligible expense. The amount can be based either on your actual cost (e.g. gas, oil, parking) or on the optional standard medical mileage rate that the Internal Revenue Service (IRS) sets.
Withdrawals for ineligible expenses
You must pay tax on any funds you withdraw from the MSA to pay for something other than an eligible medical expense.
Also, if you’re younger than 59 1/2 years old, funds withdrawn to pay for something other than eligible medical expenses are subject to a 10% penalty.
You can deduct contributions to an Idaho MSA from your adjusted gross income when you file an Idaho income tax return. A single person can contribute up to $10,000 each calendar year, and a married couple filing jointly can contribute up to $20,000.
Interest earned on this account is also deductible.
You take these deductions only on your Idaho individual income tax return, not your federal (IRS) tax return.
Using your MSA
Your funds must be in the MSA before you pay the expense.
On May 1 you visit the doctor and on May 3 you open an MSA with a $200 initial deposit. You receive your doctor’s bill for $500 on May 20 and pay that bill (from a different account) on May 25. On June 10 you deposit $400 into your MSA. However, you may only reimburse yourself $200 from the MSA because that was the amount that was in the account at the time you paid the bill.
If you mistakenly deposit money to your MSA, you can withdraw it within 30 days with no tax consequences.
If you mistakenly withdraw money from your MSA, you can redeposit the money within 30 days with no tax consequences. Because it’s a reimbursement, it’s not included in your contribution dollar limit.
If you take money from your MSA to pay a medical bill but then your insurance company reimburses you for that expense, you must deposit the reimbursement into your MSA within 60 days of the date you received the reimbursement.
- If you redeposit the funds into the MSA, it’s not included in your contribution dollar limit because it’s a reimbursement.
- If you don’t redeposit the funds, you must include them in taxable income, and you might owe a penalty.
Working with your financial institution
Your financial institution is only required to send a statement showing the amount of interest the account earned, as it does for any other account. The account holder is responsible for keeping accurate records of contributions, distributions, and rollovers.
If you choose, you can move your MSA from one financial institution to another as long as you reinvest the money from the old MSA in a new MSA for the benefit of the same account holder within 60 days of the withdrawal.
Death of the account holder
If the beneficiary is a surviving spouse, the account will continue to qualify as an MSA, and the spouse can use it. If the beneficiary isn’t a surviving spouse, the account no longer qualifies as an MSA.
The beneficiary (including an estate) must include in income the amount in the MSA — less any of the decedent’s medical expenses that the beneficiary paid within one year of the death.
Tax deduction information
If you pay health insurance premiums from your MSA, you can’t also claim the Idaho deduction for health insurance premiums for those contributions.
If your health insurance premiums are deducted from your wages on a pre-tax basis, you can’t withdraw those premiums from your MSA to reimburse yourself. Review your W-2 form information or check with your payroll office if you’re unsure if your insurance premium deductions are pre-tax.
You can claim on your Schedule A the qualifying expenses you’ve paid from your MSA, both for your federal and Idaho tax return filings.