So you're looking to take control of your finances and prepare yourself for whatever unexpected healthcare costs come your way. One option that is becoming increasingly popular with every passing year is the HSA. A health savings account (HSA) offers a myriad of benefits.

Not only can you put money aside and grow your account over many years, but you can take advantage of tax benefits to save as much money as possible! The triple-tax advantage of HSAs is well-known. But what most people don't realize is that those advantages apply to federal income taxes. However, state taxes are a bit different.

The Basics of HSA Tax Advantages

There are three substantial tax advantages available to those who open an HSA. The first is the option to deduct your contributions from your taxable income. When filing HSA tax forms, you can see how much you deposited into your account up to the annual limit. You can use that to lower your taxable income and possibly minimize your tax bill.

The second advantage is tax-deferred growth. HSAs generate interest like any other savings account. You can also pay vendors to invest your funds for even more growth. Whatever you gain is tax-deferred.

Finally, there's tax-free distribution. If you use your HSA for qualified medical expenses, you won't pay a dime in taxes on those distributions.

HSAs and State Taxes

Those perks apply to federal taxes. But what about state taxes? The good news is that HSAs are tax-deductible in most states. But there are some notable exceptions.

Unfortunately, those living in California and New Jersey must pay tax on HSA contributions. Residents in those states typically have more HSA tax forms to worry about, too.

You don't have to pay taxes on your HSA contributions in New Hampshire and Tennessee. However, you must pay taxes on the account's earnings. Any interest or investment gains are subject to state taxes.

Understand Your Tax Responsibilities

Luckily, there are only a few states that tax HSAs. If you live in one of the states mentioned above, reach out to a tax professional. Be vigilant about your tax responsibilities and fill out all appropriate forms to avoid trouble.

Author Resource:-

Daniel Stewart has been helping people with their money management and personal finance with over 15 years’ experience in business finance. You can find his thoughts at HSA strategy blog.