Health savings accounts (HSAs) are tax-deductible savings plans that allow you to put aside pre-tax dollars for future health care expenses. Pre-tax dollars are subtracted from your pay before taxes are withheld, so you don't pay tax on that portion of your income.
According to the Internal Revenue Service (IRS), an HSA is a tax-exempt custodial or trust account that's set up with a trustee. Distributions aren't taxed as long as you use the money to pay for qualified medical expenses.
Key Takeaways
- Health savings accounts (HSAs) are tax-deductible savings plans that allow you to save pre-tax dollars for future medical expenses.
- Pre-tax dollars are subtracted from your pay before taxes are withheld, so you don't pay tax on that portion of your income.
- Eligibility rules require that you be enrolled in a high-deductible health insurance plan to qualify for an HSA.
- There's a cap on how much you can contribute and save each year when it comes to health savings accounts.
- Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses.
Qualifying Rules for HSAs
Eligibility rules require that you be enrolled in a high-deductible health insurance plan to qualify for an HSA.
The high-deductible plan must meet certain requirements. For 2022, the minimum annual deductible limit is $1,400 for self-only coverage ($1,500 for 2023) and $2,800 for family coverage ($3,000 for 2023).
There are no income limitations to qualify for health savings accounts, unlike individual retirement accounts (IRAs), which do have income limits.
Contribution Limits for HSAs
There's a cap on how much you can contribute each year when it comes to health savings accounts. The contribution limits to HSAs for those under a high deductible plan are as follows:
- For 2022, contribution limits to HSAs are $3,650 for self-only coverage and $7,300 for those with family coverage.
- For 2023, contribution limits to HSAs are $3,850 for self-only coverage and $7,750 for those with family coverage.
Contributions made by your employer count toward these limits. Those who are age 55 or older can contribute an additional $1,000. This "catch-up" contribution isn't indexed for inflation, so it's the same amount from year to year. Plus, you can make this additional contribution at any time during the year.
Note
You are not permitted to make HSA contributions if you're enrolled in Medicare.
Tax Treatment for HSA Contributions
Contributions to an HSA are tax-deductible on your Form 1040 tax return as anadjustment to income. However, you don't have to take them as anitemized deduction for medical expenses, which is advantageous because itemized medical deductions are limited to expenses paid in excess of 7.5% of your adjusted gross income in the tax year 2022.
Important
The IRS indicates that contributions to your HSA made by your employer can be excluded from your gross income, but you also can't claim a tax deduction for them.
Contributions for a particular tax year are due by the same day as the filing deadline for your tax return, which is usually April 15, unless this date falls on a weekend or a holiday or is otherwise extended.
Earnings Are Tax-Exempt
Earnings, such as interest and dividends from the money contributed to an HSA, are tax-exempt at the federal level. Interest or other investment income earned on the contributions are not included in your tax return.
Withdrawing From Your HSA
Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses.
"Qualified" expenses are detailed in IRS Publication 502, Medical and Dental Expenses. They include most medical costs, from birth control pills to guide dogs to surgery.
They also include mileage traveling to and from treatment, but not costs associated with items that are just considered "healthy," like vitamins or gym memberships. Qualified expenses include costs incurred on behalf of yourself, as well as your spouse and any dependents.
Using an HSA as a Tax-Planning Tool
HSAs accumulate earnings and income without being subject to forfeiture the wayflexible spending accountsare if they're not used.
Money held inside an HSA can be withdrawn at any time for qualified medical expenses, so an HSA can be used to accumulate tax-free income for use later in life. You can build tax-free savings for future medical expenses as you age.
Tip
HSAs additionally offer people with few medical expenses a tax deduction upfront in the years that contributions are made.
How To Claim the Deduction
Financial institutions report HSA contributions on IRS Form 5498-SA, which is sent to both the taxpayer and the IRS. You can then report your tax-deductible HSA contributions onForm 8889, with the total contributions transferred to and reported on your Form 1040.
Frequently Asked Questions (FAQs)
Can you file federal tax returns for free if you want to deduct HSA contributions?
Tax-filing services like H&R Block have service tiers starting at a free filing option. However, these free filing options typically only include the most basic tax forms, so you might have to pay extra for a level of service that processes Form 8889 and deducts HSA contributions. Depending on your income, you may qualify for IRS Free File, which may allow you to process your tax return for free.
When can I take the HSA deduction?
HSA contributions are deductible for the year in which you made them. In other words, if you made HSA contributions in 2022, then you will claim the corresponding deductions when you file your 2022 tax return before the April 18, 2023 deadline.
FAQs
Your contributions may be 100 percent tax-deductible, meaning contributions can be deducted from your gross income. All interest earned in your HSA is 100 percent tax-deferred, meaning the funds grow without being subject to taxes unless they are used for non-eligible medical expenses.
What are the tax benefits of an HSA account? ›
Any interest or earnings on the assets in the account are federal income tax-free. Amounts contributed directly to an HSA by an employer are generally not included in taxable income. Also, if participants or someone else make after-tax contributions to their HSA the contribution may be tax deductible.
What are the benefits of a HSA account? ›
A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your out-of-pocket health care costs.
What is the downside of an HSA? ›
- Requires detailed tracking of transactions and receipts. - IRS regulations can complicate expense tracking. - Accounts can be invested to grow over time. - Risks of penalties and taxes for non-qualified expenses.
What is a benefit of after-tax contributions to an HSA? ›
If you contribute to your HSA with after-tax dollars, you may deduct the contribution amount, subject to the maximum annual contribution limits, from your taxes at filing time.
Is it worth investing your HSA? ›
Comparing HSA to 401(k)
But your HSA can be one of the best accounts for saving for retirement. Not only can you invest1 your HSA and potentially capitalize on tax-free growth, but your HSA also delivers powerful tax advantages you can't find anywhere else.
What happens to your HSA when you turn 65? ›
Once you turn 65, you can use the money in your HSA for anything you want. If you don't use it for qualified medical expenses, it counts as income when you file your taxes. Six months before you retire or get Medicare benefits, you must stop contributing to your HSA.
Why is my HSA being taxed? ›
An HSA distribution—money spent from your HSA account—is nontaxable as long as it's used to pay for qualified medical expenses. HSA distributions used for anything other than qualified medical expenses are not only taxable, they're subject to an additional 20% penalty if you're not disabled or are under the age of 65.
How do I claim my HSA on my taxes? ›
Use Form 8889 to:
- Report health savings account (HSA) contributions (including those made on your behalf and employer contributions),
- Figure your HSA deduction,
- Report distributions from HSAs, and.
- Figure amounts you must include in income and additional tax you may owe if you fail to be an eligible individual.
The short answer: As much as you're able to (within IRS contribution limits), if that's financially viable. If you're covered by an HSA-eligible health plan (or high-deductible health plan), the IRS allows you to put as much as $4,150 per year (in 2024) into your health savings account (HSA).
HSAs might also not be a good idea if you know you will be needing expensive medical care in the near future. When you have a copay, you know how much it will cost to visit the doctor but it can be difficult to find out the cost of medical care when you are paying yourself.
Do I ever lose my HSA money? ›
With an HSA, there's no “use it or lose it” provision. This is one of the primary differences between an HSA and an FSA. If you put money in your HSA and then don't withdraw it, it will remain in the account and be available to you in future years.
What happens to HSA when you retire? ›
Once you reach age 65, money held in an HSA can be withdrawn and used for any reason, the only catch being that you'll pay ordinary income taxes on withdrawals not used for qualified medical expenses. This means that your HSA can essentially function similarly to 401(k) plans or IRAs.
How much will an HSA save me on taxes? ›
HSA Tax Advantages
Your contributions may be 100 percent tax-deductible, meaning contributions can be deducted from your gross income. All interest earned in your HSA is 100 percent tax-deferred, meaning the funds grow without being subject to taxes unless they are used for non-eligible medical expenses.
What are the triple tax advantages of HSA? ›
An HSA has a unique triple tax benefit: Your contributions reduce your taxable income. Any investment growth within the account is tax-free. Qualified withdrawals (that is, ones used for medical expenses) are tax-free.
What happens to money in HSA if not used? ›
HSA money is yours to keep. Unlike a flexible spending account (FSA), unused money in your HSA isn't forfeited at the end of the year; it continues to grow, tax-deferred.
Is HSA use it or lose it? ›
With an HSA, there's no “use it or lose it” provision. This is one of the primary differences between an HSA and an FSA. If you put money in your HSA and then don't withdraw it, it will remain in the account and be available to you in future years.
Are HSA plans worth it? ›
The Bottom Line. For those who choose high-deductible health plans (HDHPs), an HSA has real advantages. It can offset your medical costs, reduce your taxes, and give you a long-term tax-advantaged savings account. An HDHP isn't the best option for everyone, but having one is the only way to get access to an HSA account ...
Do HSA contributions reduce AGI? ›
When you contribute money to an HSA, it decreases your adjusted gross income (AGI) which determines your taxable income. Since the U.S. runs on a tax rate system based on your income, the lower your AGI, the lower your tax bill.
Do HSA payments count towards deductible? ›
One of the great benefits of the HSA is that it can be used to make payments that count toward your deductible. Moreover, the HSA is a tax shelter, meaning you won't pay income taxes on the money you contribute.
