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How does your HSA impact your tax returns?

3 min read • November 10, 2018
30 sec brief

If you have a high-deductible health plan, you already know how expensive basic health care can be. It takes a while for your insurer to start paying their share, and you’re with higher than average out-of-pocket health costs. Health savings accounts (HSAs) are one way to spend less. You can contribute pre-tax, and make withdrawals...

If you have a high-deductible health plan, you already know how expensive basic health care can be. It takes a while for your insurer to start paying their share, and you’re with higher than average out-of-pocket health costs.

Health savings accounts (HSAs) are one way to spend less. You can contribute pre-tax, and make withdrawals without owing a dime. But there’s a catch — you need to report both of these transactions at tax time. By understanding your HSA, you’ll avoid unnecessary headaches and maximize your tax savings.

Get organized with these HSA tax forms

The beginning of every year includes a flurry of tax forms to chase down. Luckily, your HSA won’t add much to your mountain of paperwork. You can avoid mistakes by knowing the purpose of these forms and which ones you’ll have to file at tax time.

  • Form W-2 – If you earned wages or a salary and your employer withheld taxes, you’ll receive Form W-2.  If you or your employer deferred money into your HSA, you’ll see the letter W in box 12.
  • Form 5498-SA – If you’ve made contributions to your HSA, your plan provider sends Form 5498-SA. Your total contributions for the year are in box 2. You’ll also see rollovers here if you’ve made any. This form is sent to the IRS on your behalf.
  • Form 1099-SA – When you take money from your HSA, you’ll receive a copy of Form 1099-SA from your plan provider. Withdrawals include direct payments for medical services or reimbursements you’ve made to yourself. Box 1 shows the total you received for the year.
  • Form 8889 – This is the form you use to report HSA contributions listed on Form 5498-SA. It will help you calculate your tax deduction. You’ll also list withdrawals from Form 1099-SA here too.
  • Form 5329 – If you deposited more than your annual HSA limit, you’ll need to report it on Form 5329.

How HSA contributions impact your taxes

If you’re like most people, you use software to file your taxes every year. Software makes things easier, but you may not realize how deductions work. Basically, there are two options.

You choose the larger of a standard deduction or your total itemized deductions. Because the standard deduction is now $12,000 if you’re single and $24,000 for married couples, it’s the better choice in most cases.

The good news is HSA contributions can still reduce your taxable income. That’s because HSA contributions aren’t itemized deductions. They are considered an “adjustment” and go on line 25 on the first page of Schedule A or Form 1040. If your employer contributes to an HSA on your behalf, it’s treated differently. It won’t be part of your gross income and you’ll see it on Form W-2.

The trouble begins if you contribute more than your annual HSA limit. If you withdraw it before filing your taxes, you’re in the clear. But if you don’t, expect to pay a 6 percent tax on the excess amount.

How HSA withdrawals impact your taxes

One of the perks of your HSA is the money grows tax-free. When you’re ready to use it, you can avoid paying taxes on qualified medical expenses. The same rule applies if you reimburse yourself with money in your HSA.

If you take money out of your HSA for other reasons, you’ll have to pay income tax and a 20 percent penalty. That’s a costly mistake to make. If you’re not sure if an expense qualifies, double-check with a tax professional.

The bottom line

When it comes to taxes, it’s easy to make mistakes. But there’s a lot at stake with your health savings account. Breaking contribution or withdrawal rules may cost you, and tax form sloppiness could turn into an error. Unless you have money to burn, you need to stay on top of your HSA so it can do its job — making your high-deductible health plan more affordable and helping you add dedicated health savings for the long-term.

If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any extra work or effort on your end.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered 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 investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered 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 investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author
Kate Dore

Kate is a nationally recognized money coach and candidate for Certified Financial Planner™ Certification.

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