As the name implies, a health savings account (HSA) is a bank account where individuals can save money toward current and future health care expenses. In a way, an HSA serves as a 401(k) fund for health care costs, because it allows individuals to save money for a specific purpose while earning interest on the funds. While anyone can have an HSA, there are requirements for those who want to use their expenses to gain income tax benefits. Here are a few of the tax benefits of a health savings account.

Increased Medical Tax Deduction

Taxpayers who have an HSA qualify for a higher amount of medical expense deductions on their tax returns. Rather than having to meet the threshold for medical expenses in order to itemize them on Schedule A, taxpayers can simply deduct the total expenses paid from their HSAs as an adjustment to income.

Since adjustments to income are deducted from gross income rather than adjusted gross income, the tax benefit may be a little lower than that for itemized deductions. However, more taxpayers qualify to use these deductions since they do not have to accrue a certain amount of expenses in order to claim them.

Tax-Free Interest

Since an HSA is a savings account, it is eligible to earn interest. As the amount of contributions increases each year, the account could generate a fair amount of interest income. Unlike traditional bank interest, though, the amount earned on the HSA is not subject to income tax by the IRS. This means that if you make the maximum contribution, you could earn a significant amount of interest that won't be taxed at all.

Qualifying to Use the HSA Deduction

There are a few qualifications taxpayers must meet in order to claim these HSA tax benefits. First, the expenses they pay from the account must be for qualified medical purposes. In addition, taxpayers who are enrolled in Medicare Part A or Part B are ineligible for HSA tax benefits.

Taxpayers must also keep their annual contributions under the annual limit set by the IRS. This limit is indexed each year for inflation. In 2013, the HSA contribution limit was $3,250 for single individuals and $6,450 for families. Any HSA contributions made in excess of the limit are subject to an excise tax.

Contributing to a health savings account can result in substantial savings at income tax time. If you learn how to take advantage of the tax benefits of a health savings account such as an increased medical tax deduction and tax-free interest, you can boost your bottom line and protect your health at the same time.