Under Obamacare, adult children under age 26 can continue to be covered under their parent’s health insurance policy, including a high deductible health plan (HDHP). As such, Brad Kucharo, CPA, CFP®* says that the adult child’s medical expenses can be paid or reimbursed out of the parent’s HSA for so long as they remain a dependent on their parent’s tax return.
Kucharo has long recommended that college-age students provide over half of their own support (college costs) from their own funds. This allows the adult child to claim a $4,050 per year dependency exemption for herself on her own tax return, and not on her parent’s return, where it would otherwise be phased out due to the parent’s higher income level. This also allows the child to claim lucrative education tax credits of up to $2,500 a year on her return. Again, these would otherwise be lost to the family, since they are also phased out for high income doctors.
Kucharo recently unearthed a hidden tax gem available to those doctors using this strategy. If the child is claimed as a dependent on their own (not parent’s) tax return, they are also eligible to set up their own HSA and deduct contributions to it, up to the yearly family maximum ($6,750 in 2017). That’s right, even if the parents are making the maximum tax-deductible contribution of $6,750 to their family HSA (go ahead and do this now for 2017), the adult child is allowed to make tax-deductible contributions up to the same amount to their own HSA in this situation.
What if the child lacks the funds to make these tax-deductible contributions? Kucharo says that’s no problem. Under the law, the doctor can make contributions from his or her own funds into the adult child’s HSA as a tax-free gift. While the doctor will not be allowed to claim a second HSA contribution deduction, the child can claim a full deduction for the contribution made on her tax return, up to the family contribution maximum of $6,750 for 2017.
So, if you have college-age (or older) children who have qualifying HDHP coverage (whether under your plan or their own), take advantage of this huge tax-saving opportunity. Not only are the contributions deductible on the child’s return, but they also grow tax-free, and can be distributed tax-free in the future to pay for qualified medical expenses.
* For more information on Kucharo’s comprehensive tax and business planning services, call 877.306.9780.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
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