Medical record keeping is important for a number of reasons. If you’re incorporating my Maximize Your Earnings investment strategy, your past records for unreimbursed medical expenses act as your ticket to future tax free withdrawals.
Even if you don't follow this strategy, you still need to keep an accurate accounting of your yearly medical expenses: It's the only way you will be able to make an intelligent decision when considering your multiple healthcare options during open enrollment.
These days, employers share the cost of healthcare with their employees. Most employers offer several "levels" or "tiers" of insurance from which you can choose. A high deductible health plan covers you for catastrophes, but if you need care during the plan year, you will pay for most of it yourself, at least initially until the deductible is met.
Even after the deductible is met, your out-of-pocket costs will be higher because high deductible health plans have higher copayment/coinsurance costs than the higher tier plans, at least until the out-of-pocket maximum is reached.
If you have ongoing medical concerns, take several or more medical prescriptions on a regular basis, and/or anticipate high healthcare costs during the coming plan year, economically you’re better off with a higher tiered plan.
In exchange for a higher share of the premium, these higher tiered plans have reduced out-of-pocket costs in the form of a lower deductible and more affordable co-pay/coinsurance percentages.
This is how most health insurance plans work. On the healthcare exchanges, the lowest tier plan is called bronze. This is where the high deductible health plans can be found. Each level higher – silver, gold, and in some markets platinum – has a higher premium but lower out-of-pocket costs when you need care. Your employer may use different “insurance speak.”
If you choose to use your employer's Flexible Spending Account, good medical record keeping is also important. Using accurate medical expense records from the previous year, you can estimate your next year's healthcare expenses much more accurately.
If you decide to incorporate my Maximize Your Earnings strategy, you'll need to keep an accurate accounting of those yearly out-of-pocket expenses. They act as a "credit" to your Health Savings Account, allowing you at any point in the future to withdraw that amount completely tax free.
For instance, tax free cash can be withdrawn from your Health Savings Account for medical expenses that occurred 8 years ago (assuming you had not withdrawn funds from your HSA previously for those same expenses).
If your income tax return gets audited, that friendly IRS auditor is going to want to see those receipts from 8 years ago, as well as your tax return from that year too (if you're crediting dependent expenses).
IRS form 8889 is where you report both your contributions and withdrawals from a Health Savings Account. File it with your tax return each year you’ve made a contribution and/or a withdrawal.
The medical expenses that are HSA eligible are the same expenses that the IRS deems as eligible for the itemized tax deduction, and the same expenses allowed for FSAs (Flexible Spending Accounts) and HRAs (Health Reimbursement Accounts). (The itemized tax deduction is only available if your medical expenses exceed 10% of your adjusted gross income.)
Might as well get into the good habit right now of knowing exactly where every penny of your healthcare expenditures go, and then putting that paperwork somewhere you'll be able to find it. Dedicate a file for this purpose, or consider digital storage.