When you open a health savings account (HSA), it’s hard to imagine your small deposit growing into a sizable stash. But routine savings paired with investing adds up faster than you may expect. And before you know it, there could be ample funds to draw from when you need them.
Sooner or later, when it’s time to tap your account, you will be grateful the money is there. You can avoid paying extra taxes by sticking to the rules and staying on top of the right forms. IRS Form 1099-SA is one of the most important ones to keep track of — here’s why.
What is IRS Form 1099-SA used for?
As you may expect, the IRS wants to know what is going on with your HSA. Your withdrawals are of interest because of the favorable tax treatment. As long as your medical expenses are qualified, taking money out of your HSA is 100 percent tax-free. Or, if you took out money for non-qualified expenses, you will owe extra taxes and penalties.
If you are guilty of the latter, there is no hiding from the IRS. That is because when you make a withdrawal, your HSA provider sends you a copy of IRS Form 1099-SA. Box 3 — which we cover in detail below — has a special code to identify your withdrawal. By law, your provider must send your form by January 31.
What to look for on IRS Form 1099-SA
When your form finally arrives, you may be eager to dive into filing your taxes. But it’s easy to get confused by all the different boxes. Here is a basic explanation of what each one means:
- Box 1 – These are your total HSA distributions — either direct payments for medical expenses or reimbursements.
- Box 2 – If you contributed more than your annual limit and earned money on the extra amount, you will see that number here.
- Box 3 – The IRS has different codes for each type of distribution. You can see a breakdown of each of these here. Code number 1 means you took a normal distribution and it’s tax-free. Alternatively, code number 5 says some or all of your withdrawals weren’t used for qualified medical expenses.
- Box 4 – If you pass away, the value of your HSA on your date of death is here.
- Box 5 – These checkboxes are for your provider to choose which type of account you have.
How to use Form 1099-SA for your taxes
When you distribute money from your HSA, your tax return has one extra hoop to jump through — Form 8889. First, your total HSA withdrawal goes on line 14a. Then, you can refer to Box 3 on IRS Form 1099-SA to see if your withdrawal was allowed. If you see code 1, you won’t owe anything extra. Code 5 is the red flag that you may owe more in taxes.
These are the two additional taxes you may owe:
- If you withdrew money for non-qualified medical expenses, you have to report it as extra income.
- You will also owe a 20 percent penalty on top of the extra taxable income. You can calculate this one line 17b of Form 8889.
Stay organized to avoid trouble at tax time
Collecting a pile of tax forms may not be your favorite activity, but they serve a unique purpose. If you took money from your HSA, watch the mail for IRS Form 1099-SA. The codes could reflect a tax-free distribution or owing more than you planned for. Either way, you won’t be able to file without having it handy.
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.