Funds set aside in a health savings account (HSA) can be double tax-free. Contributions are tax-deductible when going into the HSA. And distributions can be tax-free when coming out the HSA.
In a nutshell
“A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA” (from Publication 969, Health Savings Accounts, IRS.gov).
- Health savings accounts (HSA) are tax-deductible savings plans that enable a person to save pre-tax dollars for future healthcare expenses.
- HSAs are paired with high-deductible health insurance plans.
- Contributions to an HSA are tax-deductible in the adjustments to income section of Form 1040.
- Contributions for a particular tax year are due by April 15th (the same day as the deadline for the filing the Form 1040). A person can contribution savings for the tax year 2016, for example, from January 1, 2016, to April 15, 2017.
- Earnings, such as interest and dividends, in the health savings account, are tax-exempt at the federal level. Any interest or other investment income earned on the contributions are not included on a person’s annual tax return.
- Withdrawals from a health savings account are tax-free as long as the funds are used to pay for qualified medical expenses.
- What counts as a qualified medical expense is detailed in Publication 502, Medical and Dental Expenses (IRS.gov).
- There’s also a handy Medical and Dental Expenses Checklist found in Publication 17, Your Federal Income Tax, Table 21-1 (IRS.gov).
How Much Can Be Saved Each Year Through an HSA?
|Health Savings Account Contribution Limits|
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No HSA contributions or tax deductions are permitted, unfortunately, if a person is enrolled in Medicare Part A or Part B.
Health Savings Accounts as a Tax Planning Tool
Health savings accounts achieve tax savings in two ways.
First, health savings accounts accumulate funds and income without being subject to forfeiture as with flexible spending accounts. Funds inside an HSA can be withdrawn at any time for medical expenses. Thus the HSA can be used to accumulate tax-free income for use later in life, thereby enabling a person to build up savings for future medical expenses.
Secondly, HSAs can be used to pay for current medical expenses. For people with few medical expenses, for example, HSAs have the effect of getting a deduction up-front, on page one of Form 1040, rather than as an itemized deduction for medical expenses which may have limited or no tax impact due to the 10% of adjusted gross income threshold. The health savings account does not have a similar limitation.
You must be enrolled in a high-deductible health insurance plan and not covered by another type of health insurance plan (such as an HMO or PPO type plan). The high-deductible plan must meet certain rules.
A person does not need any particular type of income to qualify for a health savings account. By contrast, individual retirement accounts require that a person has earned income. There is no such requirement for HSAs.
Where to Claim the Deduction
Report your tax-deductible HSA contributions on Form 8889, with the total contributions also reported on Form 1040.
Financial institutions report HSA contributions using Form 5498-SA, which is sent both to the taxpayer and to the IRS.
Reference Material about Health Savings Accounts
on the IRS Web site
- Instructions for Form 8889
- Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
- Health Savings Account at a Glance
- Publication 502, Medical and Dental Expenses
- Health Savings Accounts Helpful Hints
Annual limits are established by Internal Revenue Service in following revenue procedures:
- Rev. Proc. 2016-28 for tax year 2017 contribution limits;
- Rev. Proc. 2015-30 for tax year 2016 contribution limits;
- Rev. Proc. 2014-30 for tax year 2015 contribution limits;
- Rev. Proc. 2013-25 for tax year 2014 contribution limits;
- Rev. Proc. 2012-26 for tax year 2013 contribution limits;
- Rev. Proc. 2011-32 for tax year 2012 contribution limits;
- Rev. Proc. 2010-22 for tax year 2011 contribution limits; and
- Rev. Proc. 2009-29 for tax year 2010 contribution limits.
Reference Material Elsewhere
- Managing Healthcare Costs with a Health Savings Account (Michael Bihari, MD, verywell.com)
- The HSA Option for Small Business Health Care (JoAnn Laing, author of “The Small Business Guide to HSAs”)
- Health Saving Account (Miriam Caldwell)
- Why Fund an HSA Instead of an IRA or 401k (Dana Anspach)
- Top 10 Frequently Asked Questions about HSAs (Bobbie Sage)