MSU Extension explains potential tax savings with Montana medical care savings account

BOZEMAN - Montanans can open a medical care savings account or make deposits into existing MSAs before Dec. 31 to reduce their state income taxes for 2024, according to Marsha Goetting, Montana State University Extension family economics specialist.

MSA account holders may deposit up to $4,500 to use for eligible medical expenses. The Montana Legislature has permanently extended the Montana Medical Care Savings Account Act.

A person with taxable income over $20,500 could save approximately $265 ($531 for a married couple) in state income taxes by opening an MSA and depositing up to $4,500 for tax year 2024, 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.

Goetting added that an MSA can be passed to others when an account owner dies. By placing a payable-on-death designation on the account, individuals can leave those funds for spouses, children or parents to use for medical expenses. MSAs are not subject to inheritance or federal estate tax if an individual's estate is valued at less than $13,610,000 in 2024.

If a person dies without designating a payable on death, or POD, beneficiary, the money in an MSA will pass to heirs designated in a written will, Goetting 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 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to reduce income tax for Montana residents is the total amount deposited in an MSA during the tax year, not the amount withdrawn for eligible medical care expenses between January and December of the tax year.

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 provides a detailed list of eligible expenses and can be found at irs.gov/publications/p502.

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

A written guide with more information, "Montana Medical Care Savings Accounts (MSAs) for the 2024 Tax Year," is available online at the MSU Extension Store. Paper copies are available from local MSU Extension offices.