Are you ready for tax season? It can be a stressful time of year for a lot of people, but hopefully you’ve been reading the Gone On FIRE HSA Series (Starts Here), and will save money when filling your tax return because you invested in an HSA.
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HSA and Tax Savings
How does an HSA save you money on taxes?
The money you contribute to your HSA is tax-deductible up to the annual contribution limit. For example, if you are in the 28 percent tax bracket and deposit $3,000 into your HSA, you could save $840 in federal income taxes. Money you take out of your HSA to pay for qualified medical expenses is tax-free. Interest you may earn on your HSA grows income tax free.
I cover all this in full detail here:
$500,000 + 6 Reasons you need a Tax-Free HSA Today
HSA Related Tax Forms
There are three tax forms associated with health savings accounts: IRS Form 1099-SA, 5498-SA and IRS Form 8889. In addition, your W-2s may have extra information as well.
- IRS form 1099-SA shows the amount of money you spent from your HSA during the tax year.
- Form 5498-SA shows the amount of money deposited into your HSA for the tax year.
- Form 8889 is the form you fill out and submit with your tax return.
The information in your 1099-SA and 5498-SA forms, often available online from your account administrator, will be used to help fill out IRS tax form 8889. Form 8889 is the only one you need to submit with your taxes.
W-2s show pretax contributions to your HSA.
All employer and employee contributions should be in box 12 of the W-2 with code “W”.
Straight from the IRS website:
File Form 8889 to:
- Report health savings account (HSA) contributions (including those made on your behalf and employer contributions).
- Figure your HSA deduction.
- Report distributions from HSAs.
- Figure amounts you must include in income and additional tax you may owe if you fail to be an eligible individual.
Reporting HSA Contributions
When you file, you’ll need to include Form 8889 to report all contributions and withdrawals associated with your HSA. The form has a line for reporting your direct contributions to your HSA, and you’ll carry that deduction to the proper line of your Form 1040. The form also has a line to report employer contributions, which you’ll fill in if you made pretax contributions via payroll deduction or if your company contributed to your account. You’ll find the correct amount on your W-2 form (box 12, code W).
What happens if I contribute too much?
If you contribute more than the allowable amount, you will have to count the extra amount as taxable income, and the IRS may have you pay a 6 percent excise tax on the excess contributions. This tax applies to each tax year the excess contribution remains in the account.
Your HSA account administrator will provide you a method to withdrawal the excess funds if needed. Do this before filling your taxes, and you won’t be penalized.
Reporting HSA Withdrawals
You should have received a Form 1099-SA from your HSA administrator reporting withdrawals from the account. You need to report those distributions on Form 8889 and indicate which were for eligible medical expenses and which were not.
Ineligible payouts are taxable, and you need to report them on line 21 of Form 1040. (HSA money withdrawn for non-medical purposes is also subject to a 20% penalty if you’re younger than age 65; that penalty is calculated on Form 8889 and carried over to line 60 of Form 1040.) See the instructions for Form 8889 for details. Also see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Withdrawals for qualified expenses
Withdrawals for eligible medical expenses are tax-free at any age. There are a ton of eligible expenses. For a few ideas, check out this post:
6 Items You Didn’t Know are HSA Reimbursable
It’s up to you to maintain records to verify that funds were used for qualified medical expenses.
So, keep receipts for qualified medical expenses — deductibles, co-payments and unreimbursed expenses such as dental visits and vision care — in case you are audited. Receipts do not need to be submitted when you file your taxes.
That means you will need to keep your receipts for as long as you can be audited – up to seven years!
Withdrawals for unqualified expenses
Funds used for unqualified expenses will be taxed as income and subject to a 20 percent penalty. If you mistakenly use your HSA for a unnqualified expense, you can return the funds to your HSA to avoid the penalty.
You have up to the tax filling deadline to get this fixed.