HSAs and Taxes: What You Need to Know

Alice Stevens

Last Updated: February 23rd, 2021

We're in the midst of tax filing season. You may be looking forward to a nice tax return or worried about how much you'll owe. If you used a Health Savings Account (HSA) last year, you'll need to have a few more documents on hand as you prepare your taxes.

HSAs are paired with High Deductible Health Plans (HDHPs). With these plans you can set aside pre-tax dollars that'll remain tax-free as long as they are used for medical expenses. The funds in your HSA rollover year to year and can be invested for more growth.

Here's what you need to know about HSAs when you file taxes this year:

  • Contributions
  • Withdrawals
  • Tax forms
  • Federal vs. state taxes

Contributions

The IRS sets annual limits on how much you can contribute to your HSA. The limits for 2020 are $3,550 for an individual and $7,100 for a family.

Knowing the contribution limits will help you maximize the tax benefits and avoid penalties for over-contributing.

Expert tips

Contribute up to the annual limit

Andrew Latham, certified personal finance counselor and SuperMoney.com managing editor
“If you didn't hit your limit and you can afford it, contribute the maximum amount before April 15 and designate them as 2020 payments before you contribute to other tax-advantaged accounts.

On the other hand, you don't want to exceed your HSA contributions limit. If you do, you will have to pay a 6 percent excise tax on excess contributions. You can use Form 5329 to work out how much you need to pay in excise tax. However, the good news is if you do mess up, you can withdraw any excess contributions from your HSA and avoid the excise tax as long as you do it by April 15 (or later if you were granted an extension). Just make sure you report the excess contributions and any interest you earned from them as income.”

Take advantage of catch-up contributions

Robert Lindstrom, CFP ®, Enrolled Agent, Provision Financial Planning
“There are two neat tricks people can use with their HSA. First, they can still contribute for 2020 directly reducing their taxable income. Second, a spouse 55 or over can contribute $1,000 as a catch-up contribution to their own HSA separate from the employee’s account as long as they are covered under the plan.”

Alistair Bambridge, Bambridge Accountants
“Contributions to HSA are before you pay any tax, for 2020 the limit is $3,550 for individual HSAs and $7,100 for families. When you are 50 or older you can contribute another $1,000 per year. Exception is if you are enrolled in Medicare, then no contributions are allowable. 

Earnings from an HSA are tax exempt which is a big plus. Withdrawals from an HSA are tax free if you use them for qualified medical expenses. If you live in New Jersey or California, you don't get to deduct the contributions on the state return, just the federal.”

Plan HSA contributions and enrollment in Medicare

John Norce, Medicare Portal president
“People with HSA accounts need to know that if they enroll in Medicare Parts A and/or B, they can no longer make contributions to their HSA. If you work at least six months past 65 and apply for Medicare, note that your Part A will start six months prior to your date of submission.  Under IRS rules, that leaves you liable to pay six months’ of tax penalties on your HSA. So it is important that you coordinate your funding of an HSA with your enrollment into Medicare A and/or B.”

Withdrawals

If you used your HSA account last year, you’ll need to document how you used those funds when you file taxes. Since these funds are tax-free because they are for medical expenses, you have to show the IRS you used the funds appropriately.

Expert tips

Use your HSA wisely

David Bakke, DollarSanity tax expert
“Health savings accounts come with tax benefits, just be careful so you don't end up paying what could be a variety of penalties and unnecessary taxes. That said, to begin with, money deposited into an HSA is free from taxation, as is any interest you may earn on the account. Just make sure that any withdrawals you make are for qualified medical expenses, because if you don't the money is considered income which is taxable, and there might be an additional 20 percent tax (assuming you are younger than age 65). 

And finally, there is one other important distinction regarding HSAs and taxes. Any qualified medical expenses which are paid for using funds from your HSA cannot also be claimed under the realm of medical deductions when filing your taxes. You can't double-dip.”

John Norce, Medicare Portal president
“For those on Medicare, you can use your existing HSA funds to pay for Medicare premiums for Parts B, C, and D as well as copayments and deductibles related to medical and prescription costs.  Also, you can use it for vision and dental expenses.”

Keep the receipts

Andrew Chen, Hack Your Wealth Founder
“You should save your receipts for qualifying healthcare purchases, but no one other than the IRS will ask to see them. Your HSA bank will reimburse you for health expenses and will not ask to see your receipts. The IRS may ask for your receipts if you get audited, but otherwise you aren’t required to submit them anywhere.”

Tax forms

There are several tax forms that you may need when you file taxes. You’ll most likely start with Form 1040 and your W-2. If you’ve been contributing to your HSA before you get your paycheck, those contributions will appear on your W-2.

You’ll also need to complete and submit Form 8889. This form summarizes all of your HSA information for the IRS.

“When filling out your tax return, you will need to report contributions to your HSA on your 2020 tax return on an IRS Form 8889 –Health Savings Account (HSA), which will be included with your regular tax return. You will report what type of high deductible health plan you participate in (self-only or family coverage), the amount of contributions that you have made to the HSA, any catch-up contributions made if you are age 55 or older, any contributions your employer made on your behalf, and any other HSA contributions made. From this, you will determine the amount of your HSA deduction and include that on your tax return.

You will also use IRS Form 8889 to report any distributions from your HSA in 2020. You will list the total amount of HSA distributions for 2020 and the amount of qualified medical expenses that the HSA distributions paid for,” says William Sweetnam, ECFC legislative and technical director.

You need to understand that if you used your HSA for medical expenses, you cannot claim those expenses as a tax deduction. The money you used to pay for them was already tax-free.

“When it comes to itemizing your medical expenses, your deductible expenses must be more than 10 percent of your adjusted gross income. If you used your HSA to pay for medical expenses, then you can’t itemize for the same expenses. 

When it comes to filing your tax returns — especially as it relates to your medical deductions — you’ll want to speak with a tax professional who can help make sense of all of the nuances, exceptions, and rules,” says Alexa Serrano, Finder.com banking and investments editor.

According to Lively, you’ll receive Form 5498-SA (HSA contributions) and Form 1099-SA (HSA distributions) from your HSA custodian by the end of May. 

You may want to request an extension for filing your taxes because of this delay. Keep in mind that extensions are only for filing, not paying your taxes.

If you’ve exceeded the HSA contribution limits for the year, you’ll also need to complete Form 5329

Federal vs. state taxes

HSAs have nice tax benefits. However, these tax benefits may be different for state and federal taxes depending on where you live.

Your taxable income is adjusted for federal taxes based on the contributions you make to your HSA throughout the year.

Many states that have an income tax also offer an adjustment for HSA contributions. “While you can always get a tax deduction for HSA contributions at the federal level, you can only sometimes get a tax deduction at the FICA and state level. You’ll only get the 7.65 percent FICA tax deduction (a unique feature of HSA contributions) if you contribute through employer payroll deductions,” says Chen.

California and New Jersey tax HSA contributions. New Hampshire and Tennessee tax HSA earnings, not contributions.

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