MSU Extension: Use an MSA as a Holiday Gift & Legacy

This is one in a series of articles focusing on estate and legacy planning. The authors are Kaleena Miller, Madison-Jefferson County Extension Agent, kaleena.miller1@montana.edu, and Marsha Goetting, MSU Extension Family Economics Specialist, marsha.goetting@montana.edu.

Montanans can open a Medical Care Savings Account (MSA) or make deposits into existing MSAs before Dec. 31 and reduce their state income taxes for 2023, according to Marsha Goetting, MSU Extension family economics specialist. MSA account holders may deposit up to $4,500 to use for eligible medical and long-term healthcare expenses during 2023. Even if you used your credit card for co-pays you can still set up the MSA and withdraw the amount for eligible medical expenses for the year.

If you are a parent, you could make a gift of $4,500 to an employed child over age 18 and encourage them to open their own MSA. That way your adult children receive the tax benefit. Or you could match what they put in an MSA as long as the account doesn’t go over $4,500.

“The Montana Legislature has extended the Montana Medical Care Savings Account Act into 2024 and thereafter also allowing for a maximum deposit of $4,500,” says Kaleena Millier Madison-Jefferson County Extension Agent. After 2024 the maximum allowed deposit will increase by the Consumer Price Index in $500 increments.

A person with taxable income over $21,600 could save approximately $303 in state income taxes by opening an MSA and depositing up to $4,500 for tax year 2023, Goetting said. Interest earned on the MSA is not subject to Montana income tax, and the balance at the end of the year rolls over for future use. That allows you to build up a fund tax-free for unexpected medical expenses. Any family who has a member with cancer can tell you about those unexpected expenses.

Goetting added that an MSA can be passed to immediate family members when an account owner dies. That’s where the legacy part comes in. By placing a payable-on-death designation on the account, individuals can leave those funds for spouses, children, or parents to use for their medical expenses.

“If a person dies without choosing a payable on death beneficiary (POD), the money in an MSA will pass to heirs named in a written will,” Miller said.

“If you do not have a written will, the MSA passes by Montana law to your heirs with priority given to a spouse,” Goetting added. “Either way, you create a legacy. If you do not have beneficiaries, you could name your favorite nonprofit in Whitehall as the POD beneficiary.” 

“The amount used to reduce income tax for Montana residents is the total amount deposited in an MSA during the tax year, not the amount withdrawn for eligible medical care expenses between January and December,” said Miller.

Eligible expenses include any items accepted by the IRS, including medical insurance premiums, prescription drugs, medical and dental services, nursing home care, eyeglasses, crutches, and transportation for medical care. IRS Publication 502 has a detailed list of eligible expenses and is easy to find. Just use your favorite browser and type in IRS Publication 502. If you don’t have a computer, ask members of the younger generation to print the publication for you.

All resident taxpayers 18 and older are eligible to set up an MSA with a financial institution even if they have a similar plan, like a Section 125 Flexible Spending Account or a Federal Health Savings Account (HSA) provided by their employers. A taxpayer does not have to be covered by a high-deductible health insurance plan to be eligible for the MSA like is required to have an HSA.

A written guide, “Montana Medical Care Savings Accounts (MSAs) for the 2022-2023 Tax Year,” is available at store.msuextension.org/publications/FamilyFinancialManagement/MT199817HR.pdf. 

If you do not have access to a computer or printer, call the MSU Extension Madison-Jefferson County Office for a copy of the printed information at 406-287-3282.