Health savings accounts (HSAs) are tax-deductible savings plans that allow you to put aside pre-tax dollars for future healthcare expenses. Pre-tax dollars are subtracted from your pay before taxes are withheld, so you don't pay tax on that portion of your income.
According to the Internal Revenue Service (IRS), an HSA is a tax-exempt custodial or trust account that's set up with a trustee. Distributions aren't taxed as long as you use the money to pay for qualified medical expenses.
Eligibility rules require that you be enrolled in a high-deductible health insurance plan to qualify for an HSA. You can't be covered by a plan such as an HMO or a PPO-type plan.
The high-deductible plan must meet certain requirements. The minimum annual deductible limit for 2021 and 2022 is $1,400 for self-only coverage, or $2,800 for family coverage.
There are no income limitations to qualify for a health savings account. Individual retirement accounts (IRAs) require that a person have earned income, but there's no such requirement for HSAs.
Limitations on Contributions
There's a cap on how much you can contribute and save each year. This amount can increase annually, although it doesn't necessarily do so.
Contribution limits were $3,600 for self-only HSAs in 2021 or $7,200 for family HSAs. In 2022, these limits increase to $3,650 and $7,300, respectively. Contributions made by your employer count toward these limits.
Those who are age 55 or older can contribute an additional $1,000. This "catch-up" contribution isn't indexed for inflation, so it's the same amount from year to year.
You can make this additional contribution at any time during the year.
You aren't permitted to make HSA contributions if you're enrolled in Medicare.
How Contributions Are Treated
Contributions to an HSA are tax-deductible on your Form 1040 tax return as an adjustment to income.
You don't have to take them as an itemized deduction for medical expenses, which is advantageous because itemized medical deductions are limited to expenses paid in excess of 7.5% of your adjusted gross income through 2021.
The IRS indicates that contributions to your HSA made by your employer can be excluded from your gross income, but you also can't claim a tax deduction for them.
Contributions for a particular tax year are due by the same day as the filing deadline for your tax return, which is usually April 15, unless this date falls on a weekend or a holiday or is otherwise extended.
Earnings Are Tax-Exempt
Earnings, such as interest and dividends from the money contributed to an HSA, are tax-exempt at the federal level. Interest or other investment income earned on the contributions are not included in your tax return.
Withdrawing From Your HSA
Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses.
"Qualified" expenses are detailed in IRS Publication 502, Medical and Dental Expenses. They include most medical costs, from birth control pills to guide dogs to surgery.
They also include mileage traveling to and from treatment, but not costs associated with items that are just considered "healthy," like vitamins or gym memberships. Qualified expenses include costs incurred on behalf of yourself, as well as your spouse and any dependents.
Using an HSA as a Tax-Planning Tool
HSAs accumulate earnings and income without being subject to forfeiture the way flexible spending accounts are if they're not used.
Money held inside an HSA can be withdrawn at any time for qualified medical expenses, so an HSA can be used to accumulate tax-free income for use later in life. You can build tax-free savings for future medical expenses as you age.
HSAs additionally offer people with few medical expenses a tax deduction upfront in the years that contributions are made.
How to Claim the Deduction
Financial institutions report HSA contributions on IRS Form 5498-SA, which is sent to both the taxpayer and the IRS. You can then report your tax-deductible HSA contributions on Form 8889, with the total contributions transferred to, and reported on, your Form 1040.
Frequently Asked Questions (FAQs)
Can you file federal tax returns for free if you want to deduct HSA contributions?
Tax-filing services like TurboTax and H&R Block have service tiers starting at a free filing option. However, these free filing options typically only include the most basic tax forms, so you might have to pay extra for a level of service that processes Form 889 and deducts HSA contributions. Depending on your income level, you may qualify for IRS Free File, which may allow you to claim HSA deductions for free.
When can I take the HSA deduction?
HSA contributions are deductible for the year in which you made them. In other words, if you made HSA contributions in 2021, then you will claim the corresponding deductions when you file your 2021 tax return in April 2022.