Tax Form 8889 is where the reporting for all of the activity on your HSA comes together and the form you’ll use to report said activity to the IRS. It’s a longer form than the others and has certain line items that could require you to complete calculations in order to arrive at the appropriate number for your situation (e.g. your maximum contribution limit and additional taxes owed). So if you’re unsure of anything you read or just want a second pair of eyes on your Tax Form 8889 before you submit it to the IRS, don’t hesitate to reach out to a tax professional.
You can find Tax Form 8889 on the IRS website, as well as detailed instructions on how to complete it. Many of the line items are self-explanatory, but we’ll walk you through some of the things you need to be aware of.
Part I: Contribution limits
In Part I, you’ll figure out whether you made any excess contributions and whether or not you have an HSA deduction for the year. HSA contribution limits are set each year by the IRS and differ whether you have an individual or family high deductible health plan. If you are over 55 you can make an additional $1,000 "catch up contribution." The contribution limit includes any contributions made to the HSAs from your respective employers or anyone else.
If you were covered by both a self and family plan at different parts of the year, pay special attention to Lines 1 and 3. On Line 1, mark the plan (either individual or family) under which you were covered for the most time during the year, and on Line 3, follow the IRS instructions for calculating your contribution limit.
A note on family coverage while both spouses have an HSA: if there were excess contributions, you can choose how you want to distribute those excess contributions. You can split them evenly, attribute them to one spouse, or come up with another distribution scheme that works for you.
On Line 13, you show your total excess contributions and you’ll need to use Tax Form 5329 to figure out the additional taxes for which you’re responsible. If you do have excess contributions, you have options. You can withdraw those excess contributions and any earnings they made by the due date, including extensions, of your annual taxes. If your employer made the excess contributions and didn’t include them in your W-2, you can include the money under “Other Income” on your tax return.
Part II: Distributions
Part II is where you report all of the distributions you received from your HSA. These include payments made directly to the medical service provider via your HSA debit card and any reimbursements you received from your HSA administrator for expenses you paid for out of pocket. You’ll use the 1099-SAs you received from your HSA trustee or administrator to complete this section.
For account-holders under the age of 65 and who have not become disabled or died, HSA distributions must be used to pay for qualified medical expenses for themselves, their spouse and their dependents. If an account-holder receives a distribution that doesn’t follow these rules, that distribution is not only taxed as part of their gross taxable income, it is also subject to an additional 20% tax penalty. If this applies to you, you’ll use Tax Form 1040 or 1040-SR to determine the additional taxes you owe.
Once you turn 65 or become disabled, there are no restrictions on how you use your HSA money.
Part III: Income, additional tax, and failure to maintain eligibility
You’ll use this section to determine the additional tax and income you need to report. If you used the “Last Month Rule,” meaning you became eligible to contribute to an HSA after the first of the year, and contributed the maximum amount for the year, you need to maintain that eligibility for 13 straight months. If you didn’t (or don’t) maintain eligibility for that time, you will have to include the excess contributions in your gross taxable income.
On Line 20, you’ll complete the calculation to determine what contributions count as additional income and on Line 21, you’ll multiply that number by 10% to determine the additional tax penalty for which you’re responsible.
Tax form 8889 is the document you submit to the IRS that determines what additional taxes you’ll have to pay. If you make any mistakes, you could be subject to penalties so it’s important to get it right. If you’re unsure of your calculations or if something doesn’t make sense to you, don’t hesitate to reach out to a tax professional. They know these IRS forms inside and out and can help guide you to the right answer.
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.