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I can’t believe I forgot yet another Tax Freedom Day. I am so busy this time of year. I didn’t even get my Happy Tax Freedom Day cards out into the mail until last night. What an embarrassment.
But yes, Tax Freedom Day was last week, June 14th to be exact. Virtually every Canadian added some extra cash to their pay cheque as of June 14th and to be honest, it could not have come at a better time. It costs $100.00 to fill my car each week and the price of food (based on the price of corn) continues to climb along side.
I think Tax Freedom Day will always be a bit of a second-rate holiday for people like me. While it is an important day for most Canadians, it holds little importance for HSA owners. After all, they already enjoy a greater degree of tax freedom when it comes to their medical expenses. When an individual business owner experiences savings of $5,000-$10,000 a year for their high-cost medical expenses through an HSA, you can understand why Tax Freedom Day is a bit over-rated. After all, an additional $150.00 in their pocket from mid-June to December isn’t going to change the world. They have turned Tax Freedom Day into a year-long event. Sort of like those neighbors who leave their Christmas lights up all year long…because they can’t get enough of the holidays I suppose.
But I am always looking for a reason to celebrate and even though I missed the official date, I still have 30 people coming over on Saturday for a Tax Freedom Day BBQ. You know, the kind where you drink lower-taxed domestic beer versus imports and play games like “pin the tail on the finance minister”. That reminds me, I need to order my dollar-shaped cake for the party!
The Alberta government officially said goodbye to the health tax in their recent budget effective January 2009, joining seven other provinces and territories (New Brunswick, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon) that don’t collect specific health premiums or taxes. These provinces fund healthcare out of general tax revenue.
So, what is an Albertan to do with their new found wealth? After all, each resident is looking at savings in the range of $528 per individual and $1,056 per family. It is a great amount to use on a new television or perhaps a BBQ for summer entertaining. But if they are self-employed, like so many other Albertans working in the oil and gas industry, they could be putting these funds into a Health Spending Account to maximize the return.
If you think about the money they are receiving back as part of their total budgetary spending, they could simply deposit the equivalent into a Private Health Services Plan. There are several HSA suppliers in Alberta who would be happy to take the money for them and in return, the taxpayer now has access to a reserve of funds to keep themselves and their family healthy. The big perk, they can double dip on the tax break they receive by making it yet another tax deduction for themselves as a PHSP. Brilliant!
I hope all self-employed Albertans will think about this as an option. It might be a small amount of money you are getting back, but it is still a great way to make it work for you long-term.
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Tax savings. I wasn’t going to add this to my blog as I assumed everyone understood this as a benefit by now. But in thinking about my posts, I wanted to ensure everyone had clarity on ALL of the benefits of a health spending account, so here we go…
When an incorporated business opens a health and welfare trust (HWT) for one employee or numerous employees, the total amount (including the administrative fees) becomes an eligible business deduction for the company – just like paper for the copier, pens, staples, or materials. It comes off the books as an expense and the impact on taxes would be the same as any other accepted expense.
For sole-proprietors, the contributions are also an eligible expense. If it is one individual with no employees, the amount deposited into their private health services plan is declared on their annual return. In almost all cases, the amount provides greater tax relief than the standard medical tax credit they would traditionally apply for. For groups, the amount deposited into each employees health and welfare trust would be considered a straight deduction similar to incorporated entities and declared along with the owner’s PHSP on their annual return.
Another opportunity for tax savings is related to salary and total compensation. Some companies incorporate an HSA into the total compensation of their employees by amending the salary to include an amount to be deposited into a Health and Welfare Trust. For example, if an employee earns $80,000 and they agree to receive a portion in HSA contribution (say $10,000/year), the employees taxable income would reduce to $70,000 and they would receive $10,000 in tax-free earnings into their HSA. The benefit for the employer is that the $10,000 becomes a business expense and the source deductions owed by the employer on behalf of the employee would be reduced from a percentage of $80,000 to one of $70,000.
Either way, the key tax savings benefit is that the HSA allows you to pay for your expenses in pre-tax dollars as opposed to after tax dollars.
Why do people hold onto their claims for such a long time? Seriously, what is that about? When I pay for a claim out-of-pocket, I submit it to Benecaid as I have a Health and Welfare Trust with them. I submit the claim form and receipt within a week of incurring the claim – but I am apparently a minority.
You see, many people batch their claims and submit them at once. What is surprising is that many people actually submit their claims once a year, sometimes for amounts exceeding $6,000! I scratch my head in amazement every time I hear this, especially if you consider the following.
Let’s say you have an HSA and make $6,000 a year in claims. For arguments sake, we will assume that you incur the same amount each month in healthcare expenses, $500. Most people batch their claims to save the cheque processing and postage fees (these average between $3.00-$4.00 at most administrators). However, if they sent them in each month, the maximum amount they would incur in fees would be $48.00/year, and that amount is being a bit aggressive. While we all like to save money, the issue here is that claims receipts have no interest bearing value – they are not making you any money while sitting in a shoebox. Or worse, the original costs are causing you to place other household expenditures onto a credit card each month and carrying a long-term balance. In which case the interest charged means that you are loosing money!
But let’s pretend that you have a big wad of cash under the mattress at home and do not need a credit card. If you submitted your claims monthly and deposited your $500/month reimbursement cheques into a RRSP at 3%/year, you would make $102.30 in one year and receive the tax deduction of $6,000 for registered savings. A year later, that amount would be worth $6,285.00 and in ten years, that initial deposit could be worth $8,200.00!! More than enough to pay for the $48.00 in fees but more importantly, you are putting your money to work for you and not letting it sit in some form of debt or non-interest bearing vehicle!
So, enjoy the tax savings from your HSA but please remember to submit your expenses for reimbursement! The faster you get the money back, the faster you can put it to work reducing debt or building wealth! I don’t want to do an interest calculation on a credit card at 22% to get the point across folks!