Tax guide

HSAs and Your Tax Return

A Health Savings Account (HSA) is a way to save money to pay for medical expenses and costs that not covered by insurance. An HSA is also a great tool for saving money not only for medical expenses, but also for retirement.

Tax Benefits for HSAs

Besides being able to set aside money tax-free, HSAs have other tax benefits:

  • Any interest they earn is not taxable.
  • There’s no “use-it-or-lose-it” rule, like with an FSA. If you don’t use all the money up in the year, it rolls over from year to year and continues earning interest.
  • If you’re healthy and don’t use much from your HSA, you can withdraw from your HSA penalty-free after you turn 65 – even for non-qualifying medical expenses. But if you use the HSA for non-qualifying expenses before you turn 65, you will be subject to a penalty.

Contributing to an HSA

You, your employer, or both can contribute to an HSA. All contributions tax-free – no income taxes or FICA (Social Security and Medicare) taxes.

There are maximums for allowable contributions. If you're the only person your insurance covers, you and/or your employer could contribute up to $3,500 annually. If your insurance plan covers you and your family, you or your employer may contribute up to $7,000. (For 2020, the amounts increase to $3,550 and $7,100.) If you’re 55 years or older, you may contribute up to another $1,000 as a catch-up contribution, whether you have single or family coverage. Careful: Whatever your maximum is, if you exceed it, a 6% penalty will be assessed.

But: If you owe any money to the IRS, the IRS can levy your HSA. And if you’re under 65, there’s a 20% penalty for involuntary distributions.

Using an HSA for Medical Expenses

You can use an HSA for qualifying medical expenses. Most HSAs provide a debit card to use for paying your expenses.

Keep any receipts from purchases you make using your HSA, as well as any statements you receive about your HSA. These documents are important if the IRS has questions about a specific expense paid for by the HSA.

Important: If you pay for a qualifying medical expense from an HSA, you can't also claim the expense as a medical deduction on your return.

If you use your HSA to purchase a non-qualifying medical expense, you’ll be subject to a 20% penalty unless you become disabled, are 65 years or older, or die.

Filing an HSA on Your Return

When you're getting ready to e-file your return, any money deposited into your HSA by your employer will be listed in box 12 of your Form W-2. If you or anyone other than your employer deposited money into your HSA, you should receive Form 5498 showing how much was deposited. When you have the total contributions for the year, fill out our Form 8889 screen on your your return.

Also see:
Who's Eligible for an HSA?
Withdrawing from an HSA
HSA Qualifying Expenses

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