Extension Explains Potential Tax Savings From Medical Care Savings Accounts

Montana residents looking to reduce their state income taxes while preparing for current and future health care costs can take advantage of a Montana Medical Care Savings Account.

In the 2025 calendar year, MSA account holders are eligible to deposit up to $4,600 to be used for eligible medical and long-term health care expenses. The amount of the deposit can be deducted from an individual’s state taxable income, resulting in financial savings, said Marsha Goetting, MSU Extension family economics specialist.

“Despite the name, MSAs are not limited to traditional savings accounts,” Goetting said. “Liquidity is key: Account holders should select financial products that allow easy access when health care needs arise.”

MSAs may be held as checking accounts, certificates of deposit, or investment vehicles such as stocks, bonds and mutual funds. Contributions must be held in a separate, individual account. Joint accounts, even between spouses, are not permitted. Goetting added that medical providers do not need to be paid directly from the MSA, but documentation of qualified expenses is required.

MSAs are available to all Montana resident taxpayers ages 18 and older, regardless of existing coverage through employer plans, flexible spending accounts or federal health savings accounts. Unlike federal HSAs, a high-deductible health plan is not a prerequisite.

Withdrawals from MSAs are tax-free when used for eligible medical costs as defined under IRS Section 213(d), 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. Funds may not be used for medical expenses reimbursed by insurance plans, HSAs, FSAs or other coverage methods.

Goetting said that while MSAs reduce state taxable income, they do not offer federal income tax benefits. Interest and investment gains earned in the account are tax free at the state level but must be reported as income on federal returns.

According to Goetting, taxpayers can save significantly depending on their tax bracket. For instance, a couple contributing the full $9,200 to MSAs in 2025 and taxed at Montana’s 5.9 percent rate could save approximately $543 in state income taxes. MSA account holders must report their contributions and earnings on the Montana Individual Income Tax Return using the designated MSA schedule.

Withdrawals for eligible MSA expenses incurred between Jan. 1 and Dec. 31 must be completed by Jan. 15 of the following year. Withdrawals for non-medical use are subject to a 10% penalty and must be reported as income unless they meet certain exceptions, such as being made on the last business day of the calendar year.

For more details about Montana MSAs, visit a local MSU Extension office, access the MontGuide online or by searching store.msuextension. org for the term “MSA.”