HSAs and Your Tax Return

Updated for filing 2021 tax returns

How does my Health Savings Account affect my taxes?

A Health Savings Account (HSA) is a way to save money to pay for medical expenses and costs. Contributions are tax-free, and you’re not taxed on money used for qualifying medical expenses, either.

An HSA is also a great tool for retirement savings, even if those savings are not for medical expenses post-retirement. 

What are the tax benefits of having an HSA?

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.

Who can contribute to my HSA and how much?

You, your employer, or both can contribute to an HSA, but there are maximums for allowable contributions. If you’re the only person your insurance covers, you and/or your employer could contribute up to $3,600 annually. If your insurance plan covers you and your family, you or your employer may contribute up to $7,200.

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.

You must self-report any non-qualifying purchases on the Health Savings Account screen. Not claiming the non-qualifying expenses may lead to an audit, and you’ll be subject to penalties and fines.

What sort of medical expenses can I use my HSA for?

You can use an HSA for qualifying medical expenses, and most HSAs provide a debit card for easy use. Some HSAs provide paper checks and online bill paying, too.

As long as your insurance doesn’t cover them OR reimburse you, qualifying expenses are the same as those qualifying for the medical expense deduction, like:

• Professional services, medical treatments, and laboratory tests
• Dental services
• Hospital services
• Over-the-Counter Medications – Because of the CARES Act, you can now use HSA funds to pay for OTC meds like painkillers, fever reducers, and more.

Keep receipts for any expense you use your HSA for, including doctor co-pays, prescriptions, and medical supplies. Also, keep all HSA statements. You don’t need to submit any of the receipts when you e-file your return, but it’s a good idea to keep the receipts in case the IRS questions an expense.

Note: 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.

What kind of insurance plan do I need to have to qualify for an HSA?

To qualify for an HSA, you need to be enrolled in a High Deductible Health Plan (HDHP), and that deductible must be at least $1,400 for an individual, or at least $2,800 for families.

Your employer may set one up through your insurance company. Otherwise, you can set up an HSA at most banks or credit unions.

Note: You can’t have an HSA of your own if you’re a dependent on someone else’s tax return.

What HSA information do I need to report on my taxes?

When you file your tax return, you have to report any withdrawals you made during the year (also known as distributions). You’ll receive Form 1099-SA either by mail or electronically—this form will show how much money was distributed in the year from your HSA, and whether it was for qualifying expenses or not.

Filing your taxes with HSA info is easy with 1040.com

We like keeping taxes simple, and that even goes if you have HSA information to report on your return. Just enter the amount of the distributions on the Health Savings Account screen on your 1040.com return, and you’ll be home free.

Feels good, doesn’t it?

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