SR Client Question: How do I handle taxes for my Health Savings Account (HSA)?
If you have a high deductible health insurance plan (HDHP), you’re eligible to contribute to a Health Savings Account (HSA) up to the annual maximum limit. Often, employers also contribute to an HSA, but your total contributions cannot exceed this maximum limit.
Contributions to an HSA require additional tax reporting. Each year, you’ll receive a form from the HSA administrator detailing contributions and distributions. For tax filing purposes, you must use Form 8889 to report contributions, ensure compliance with contribution limits, and determine eligibility for further contributions. If you make distributions, this form also confirms whether the withdrawn funds were used for eligible medical expenses. Receipts or documentation are necessary only if requested by the IRS.
An HSA can serve as a tax-advantaged retirement savings account. Contributions made through an employer HSA offer triple tax benefits: 1) contributions are not subject to income taxes or social security taxes, 2) funds grow tax-free, and 3) withdrawals are tax-free if used to reimburse yourself for medical expenses incurred anytime after the HSA was established. After turning 65, withdrawals are penalty-free (20% penalty) even without medical expenses, though withdrawals are subject to income taxes.
To track expenses for potential reimbursement later on, we recommend clients maintain key documents in their permanent tax files: annual Explanation of Benefits (EOB) statements from health insurers detailing services and out-of-pocket costs, summaries from other medical providers like eye care and dental services, and receipts for major medical expenses not covered by these summaries. These documents should cover most medical expenses incurred. Additionally, keep receipts for smaller qualifying expenses such as contact lens solution, bandages, chiropractic care, eyeglasses, and contact lenses. For a comprehensive list of eligible expenses, refer to IRS Publication 502, starting at Page 5.
For more detailed information on to handle Health Saving Accounts and taxes, contact your ShindelRock tax professional.