Are HSA Contributions Tax-Deductible?
- Carla Fried
- 2 min read
If you have an HSA, you've probably heard about multiple different tax savings. Does that mean that your HSA is tax-deductible?
Short answer: Yes, your contributions to a Health Savings Account (HSA) are tax-deductible under certain circumstances.
But that’s just the beginning of the tax breaks. Any money in your HSA account is not subject to tax. Plus, when you withdraw money from your HSA to pay a qualified medical expense, there will be no tax bill.
While everyone is eligible for a tax deduction on their HSA contribution, the mechanics of how you pocket the deduction varies depending on how your contributions are made. In this post we'll discuss tax deductions and how your taxes can be deducted if you have an HSA.
What are tax deductions?
Before diving into your health savings account (HSA), it helps to understand what tax deductions are and how they save you money.
The first step is adding all the income you received for the year. After that, the IRS allows you to subtract certain items to reduce how much of your income is taxable.
Next, you choose one of two options: itemize or take the standard deduction. 2017's tax law changes nearly doubled the standard deduction. Because of this, itemizing won’t necessarily offer you the biggest discount.
The good news is, your HSA deduction stays intact regardless of which option you choose. That’s because it’s not part of your itemized deductions and subtracted during the first step.
There are several scenarious to take into an account if you have an HSA:
Your HSA is a workplace benefit that you contribute to through automatic payroll deductions.
Your contributions are pulled from your paycheck before taxes, effectively reducing your taxable income for the year. In other words, your tax deduction is automatic. The deduction happens in the payroll department; there’s nothing you need to do to reap the benefit of this tax break.
Your employer contributes to your HSA.
The dollars that your employer contributes to your HSA account are not counted as “income” to you. You receive the financial benefit, without the value of the contribution being added to your taxable income for the year.
Note: Both you and your employer can contribute to your HSA. Combined total contributions must not exceed the annual HSA limits set by the IRS, which differ whether you have individual or family coverage. If you are over 55, you may also make an additional $1,000 catch-up contribution.
You fund your own HSA.
If you are self-employed, or your employer doesn’t offer an HSA tied to an HDHP, you will be in charge of setting up your own HSA account. (It’s easy.) In this scenario, your contributions will be made from regular after-tax money you’ve got sitting in a bank account. Don’t worry, you will still be able to deduct your contribution, but it requires an additional step when you file your federal tax return: fill out IRS Form 8889 and your contribution will be deducted from your taxable income.
Get and stay organized for tax time
For a detailed look at HSAs and taxes, consult our HSA tax guide. In addition, we've collected the tax forms you may need when you have an HSA.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.