A knee replacement, a cancer diagnosis, a kid's emergency surgery. Nobody plans for these, and yet almost every family we work with in Brookings faces some version of it eventually. The instinct is to build a savings cushion and hope it's enough. That's a reasonable start, but it's not a plan. The families and business owners who come through a medical crisis with their finances intact are almost always the ones who set up their tax strategy before the bill arrived, not after.
The Federal Reserve's Report on the Economic Well-Being of U.S. Households (opens in new tab) has tracked for years how many households can't absorb a $400 surprise expense without borrowing or selling something. Medical bills routinely run into the thousands, and a savings account alone rarely closes that gap. What closes it is a combination: money set aside in the right account, and a tax return built to capture every dollar the IRS already allows you to deduct.
An emergency fund buys time, tax strategy buys relief
Cash reserves matter. Three to six months of expenses sitting in a bank account keeps a medical event from becoming a cash-flow crisis overnight. But an emergency fund is passive money. It sits there earning almost nothing and gets taxed the same whether you use it for a car repair or a hospital stay.
A Health Savings Account works differently. Contributions go in pre-tax, the balance grows tax-free, and withdrawals for qualified medical expenses come out tax-free too. That's a triple tax benefit no regular savings account offers. For 2024, the IRS allows HSA contributions up to $4,150 for self-only coverage and $8,300 for family coverage, with an extra $1,000 catch-up if you're 55 or older. A farm family carrying a high-deductible health plan, which many ag operations do to control premium costs, can build a meaningful tax-advantaged reserve specifically earmarked for medical costs, separate from the general savings they're using for equipment or land payments.
Unused HSA funds roll over year after year. There's no use-it-or-lose-it deadline like with a Flexible Spending Account, which makes the HSA the better long-term tool if your health plan qualifies. An FSA still has a role for predictable annual expenses like orthodontia or contacts, but it caps out lower and typically expires the funds each year, so it's worth pairing rather than choosing one over the other.
What counts toward your medical expense deduction
Even without an HSA, the tax code gives you a second lever: the itemized medical expense deduction. Under current law, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, but only if you itemize instead of taking the standard deduction. IRS Publication 502 (opens in new tab) lays out exactly what qualifies, and the list is broader than most people expect: mileage to appointments, certain home modifications for a disability, long-term care premiums, even some travel costs for treatment.
Here's where the planning matters more than the deduction itself. If your medical expenses for a given year are going to land near that 7.5% threshold anyway, timing elective procedures, dental work, or vision correction into the same calendar year can push you over the line and unlock a deduction that would otherwise disappear. Spread those same expenses across two years and you might clear the threshold in neither one. This is a conversation worth having with your accountant in October, not April, because by the time you're filing, the timing decision is already gone.
Building the plan before the bill shows up
The strongest position we see is a household or business owner running both strategies together. Money flows into an HSA throughout the year, funded automatically like a retirement contribution. A general emergency reserve sits alongside it for expenses the HSA doesn't cover, like a deductible on a disability policy or a gap in coverage during a job transition. Then, once a year, we look at whether bunching elective medical expenses into a single tax year makes sense given where the household's income landed.
For a farm operation, this gets more layered. A bad weather year can already push income down, which changes how the 7.5% AGI threshold behaves and can make medical deductions land differently than in a strong crop year. Multi-entity structures add another wrinkle, since medical expenses paid personally don't automatically flow the same way depending on how the business and the individual are set up. This is the kind of detail that gets missed when tax prep happens once a year in a rush, and it's exactly what year-round tax planning and preparation is built to catch.
Professional service business owners face a related version of the same problem. A single-owner practice with no HSA in place and thin cash reserves is one surgery away from a serious cash-flow disruption, on top of losing billable hours during recovery. Setting up the account structure now, before anyone needs it, is the cheap insurance most owners skip because it doesn't feel urgent until it is.
Long-term medical costs deserve their own conversation too. A short-term crisis and a long-term care need call for different tools, and we've laid out how long-term care insurance, VA Aid and Attendance benefits, and self-funding compare in our piece on planning for long-term care costs. If a family member's health situation looks like it's heading toward ongoing care rather than a one-time event, that's worth reading before deciding how much to keep liquid versus how much to put toward insurance.
The common thread across every scenario: waiting until the bill arrives to think about taxes means you've already lost the ability to plan around it. We've written before about why waiting until December to plan costs high-net-worth individuals real money, and the same logic applies here at every income level. A deduction you didn't structure for doesn't show up on its own.
Common Questions
How much should I keep in an emergency fund versus an HSA? A reasonable split is three to six months of living expenses in a liquid emergency fund, with your HSA funded up to the annual limit if your health plan qualifies. The HSA money should be treated as untouchable except for medical costs, since it's the only account offering tax-free growth and tax-free withdrawals for that purpose.
Do I need to itemize to get any tax benefit from medical expenses? Yes, for the medical expense deduction specifically, since it only applies if your itemized deductions exceed the standard deduction. HSA contributions are different and reduce your taxable income regardless of whether you itemize, which is one reason the HSA is usually the more reliable tax benefit for most households.
Can I use HSA funds for a family member's medical bills? You can use HSA funds for your spouse and any tax dependents, even if they're not covered under your specific high-deductible health plan. Keep receipts, since the IRS can ask for documentation showing the withdrawal went toward a qualified expense listed in Publication 502.
What happens if my medical expenses don't hit the 7.5% AGI threshold? If they don't, you get no deduction for that year under current law, which is exactly why timing elective procedures matters. Bunching predictable expenses like dental work or new glasses into a year when you're already near the threshold, rather than spreading them out, is a decision your accountant can help you time before December 31.
If a medical event, an aging parent's care needs, or just the uncertainty of not having a plan has been sitting in the back of your mind, reach out to our team and we'll walk through what an HSA, your deduction picture, and your reserve fund should actually look like for your situation.
