Taxes and HSAs – What You Need To Know

Taxes and HSA

It’s everyone’s “favorite” time of the year – tax season! If you’re wondering how to handle your HSA expenses at tax time, we’ve got the information you need about taxes, HSA tax forms, and what to do before the tax filing deadline.

As you know, tax filing season means there are often numerous IRS forms that have to be filled out. When it comes to HSA tax forms, there are two very important documents for this process – Form 8889 and Form 1099-SA – in addition to Form 1040.

Form 8889

Form 8889 is used to report all contributions and withdrawals associated with your HSA during the tax year. This form must be completed if you or anyone else made contributions to your HSA, you made withdrawals from the account, or you acquired an interest in an HSA due to the death of the account beneficiary. 

Use Form 8889 to:

  • Report all HSA contributions, even those made on your behalf by your employer or others
  • Figure your HSA deduction
  • Report distributions from HSAs
  • Figure amounts you must include in income and any additional taxes you may owe

Download instructions for Form 8889.

Avoid These Two Common Mistakes on Form 8889

Anyone can contribute to your HSA, which can lead to a mistake when filling out this form.

Line 2 of Form 8889 lists the amount you contributed to your HSA. However, this line is only for contributions that are not made through pre-tax payroll deductions.

Use line 9 to enter contributions taken directly out of your paycheck. Your employer or HSA administrator will track your payroll contributions. If you are self-employed, or if anyone else contributed to your account, you will need to keep track of those expenses.

Line 3 asks you to enter the annual limit (individual or family) you were allowed to contribute during the taxable year. Keep in mind that you must have a high deductible health plan (HDHP) in order to be eligible for an HSA. If you didn’t participate in an HDHP plan the entire year, you are not eligible to contribute the full amount.

Refer to the IRS Instructions for Form 8889 to determine the correct amount. If you had a change in status last year (i.e., single to married or married to single), learn how a mid year change of status changes how much you can contribute.

Form 1099-SA

You should receive Form 1099-SA, which reports all withdrawals from your account, from the HSA administrator. It will already have the information you need for tax purposes; you do not have to enter any information on the form. Any distributions you received will be reported on this form; the total should be carried over to Form 8889, as mentioned in the previous section.

Download instructions for Form 1099-SA.

If box 3 of your Form 1099-SA form contains a No. 5 distribution code, this means you used some account distributions for non-approved HSA purchases. The amount spent on ineligible purchases must be reported on your tax returns, using Form 8889.

HSA funds spent on non-qualified items are subject to income tax plus a 20% excise tax. The amount in box 3 of your 1099-SA should be listed on line 15 of Form 8889. It also needs to be listed on the “other income” line of the standard 1040 tax form. If you use a tax software program, the program should make the calculations and fill in the correct amount on each form for you.

HSA Tax Advantages

That’s the important stuff to know regarding taxes and HSAs as the annual filing deadline approaches. However, there are other tax advantages to an HSA that you may not be aware of.

For instance, withdrawals for eligible medical expenses are tax-free at any age. Keep in mind that you should keep your receipts to validate your withdrawal; your HSA administrator is not obligated to confirm the accuracy of your expenses.

Another perk is that you may withdraw money for eligible medical expenses at any time. There is no deadline for using the money. That means that you can pay out-of-pocket for expenses like copays and deductibles, let your account grow with tax-free interest, and later on make tax-free withdrawals to get reimbursed. The only caveat is that your receipts must show that you incurred the expense after the account was established. Of course, you also have to ensure that you report the year you make the withdrawal.

Gather All Medical and Healthcare Receipts

It’s always good to have supporting documents at tax time. Some people use their HSA primarily to pay for current healthcare expenses. Others use it more as a long-term savings tool, investing the funds for the tax-free earnings. Either way, it’s a good idea to keep all receipts from HSA purchases. If the IRS challenges the eligibility of an expenditure, the receipt can provide evidence that it was an approved purchase.

Tax Filing Deadline

Historically, HSA owners have been allowed to maximize contributions for the previous year all the way up to the tax filing deadline (usually April 15).

If you need assistance with tax filing, contact a tax preparation specialist.

View IRS Publication 969.

DataPath, Inc. creates cloud-based HSA management solutions for third party administrators.

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