One of the perks of an HSA is that there are multiple ways you can build your savings. You can contribute from your paycheck, your employer can contribute to your account, as well as your spouse, your parents, and any other loved one. You can also transfer money from another HSA and you can conduct a one-time transfer from an IRA. Another great rule is that you can contribute to your HSA up until Tax Day, April 15th, 2020, and have those contributions count towards your 2019 income taxes.
But, there are limits to the amount you can contribute in any given year and in 2019 those limits were: $3,500 for an individual and $7,000 for a family. In 2020, those limits increased to $3,550 for individuals and $7,100 for families. If you turned 55 by December 31, 2019, you can contribute an additional $1,000 for the 2019 and 2020 tax year.
It’s important to note, that if you have an HDHP that covers you, and your family is covered under a different health plan, you are still bound by the individual contribution limits. You can, however, use your HSA money to pay for any eligible medical expenses your family may have.
Use Form 5329 to Report Over Contributions
If you over-contributed to your HSA, what do you do? Well, you have a couple options. First, you can withdraw the excess contributions before Tax Day and avoid any penalties and extra paperwork. It’s important to note that simply spending the excess contributions on qualified medical expenses is not considered a withdrawal (it’s a distribution). To withdraw your contributions, contact your HSA administrator.
Your second option, if you’ve over-contributed, is leaving the money in your HSA account and filing Tax Form 5329 with your Income Tax Form-1040, 1040-SR or 1040-NR. If you don’t need to file income taxes for 2019, you will need to file Form 5329 on its own and you can’t do it electronically. If you’re filing a Form 5329 for a previous year’s contributions, you must use that year’s version of the form.
How to Find and Complete Form 5329
If you’ve decided to keep your excess contributions in your account, you can find Tax Form 5329 on the IRS website. This form is used to report any additional taxes owed for the following tax-advantaged accounts: HSAs, Archer MSAs, covered ESAs, QTPs, modified endowment contracts, IRAs, and other qualified retirement plans. Because this form covers so many different accounts, you will have to ignore the many boxes that don’t apply to your situation.
First, complete the top section that asks for your personal information. Then skip to Part VII which focuses specifically on HSAs. Here, you’ll input the following information (as well as do a bit of math):
- Line 42. Enter your excess contributions from 2018
- Line 43. Subtract the amount of your contributions (Line 12 from Tax Form 8889) from the contribution limit ($3,500 for individual, $7,000 for family).
- Line 44. Enter your 2019 distributions from your HSAs (Line 16 from Tax Form 8889).
- Line 45. Add lines 43 and 44.
- Line 46. Subtract line 45 from 42, if number is less than zero, enter zero.
- Line 47. Enter excess contributions for 2019. Line 48. Add lines 46 and 47.
- Line 49. Calculate the additional taxes owed by multiplying line 48 by 0.06 (6%).
For detailed directions on how to fill out Form 5329 see IRS website.
Yes, you will owe a 6% tax penalty for over-contribution. You will also have to pay additional income taxes on those excess contributions. If you decide that you don’t want to pay that penalty or additional income tax, the IRS will charge you 6% for every year that’s passed since you made the excess contributions. It’s best to handle the situation as quickly as possible to prevent having to pay even more fines.
Navigating the labyrinth of tax forms every year can feel daunting, especially if you’re doing it by yourself. But we’ve put together a comprehensive guide to help you file the right forms correctly. As always, if you have a question that we don’t answer, a special circumstance or if you simply don’t feel comfortable filing your taxes yourself, reach out to a tax professional who can help you.
Looking for more information on how to fill out your 2019 taxes when you have an HSA? Check out Lively's 2019 HSA Tax Guide.
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.