SR Client Question: How do I handle taxes for my Health Savings Account (HSA)?
If you have a high deductible health insurance plan (HDHP), then you qualify to make contributions to an HSA up to the maximum limit for the year. Many times, an employer will also fund some of an HSA as well, but you are still limited to the overall maximum.
HSA contributions do create some additional tax reporting. You will also receive a form each year from the agent holding the funds showing the contribution and/or distribution amounts. For your tax return filings, there is a required form (Form 8889) that reports the contribution and makes sure you’re not above the limit and also shows if you are eligible to contribute more. If there are distributions, then that same form has a section to affirm whether or not the withdrawn funds were used for eligible expenses. You only have to provide receipts or other documentation if requested by the IRS.
An HSA can also be used as a kind of tax-free retirement savings account. An HSA done thru the employer enjoys a “trifecta” of tax savings: 1.) the funds are not taxable for income taxes and social security taxes, then 2.) that pre-tax money grows tax free, and 3.) when it’s withdrawn it’s tax-free (if used to reimburse yourself for medical expenses from any point after the HSA is created). And once you’re 65, you can withdraw from it without penalty (20%) even if there are no supporting medical expenses being reimbursed. However, in this case, the withdrawn funds amounts would still be subject to income taxes.
For tracking expenses to be able to reimburse yourself at a later date, I advise clients to add the following items to their permanent tax file: their annual EOB statement from their health insurance provider listing out all of the medical services and what their out of pocket expenses were, an annual summary from other medical providers like eye care and dentist, and receipts for any major medical costs not included in the aforementioned items. These items should encompass the majority of the medical expenses incurred. You can also keep track of receipts for other smaller qualifying expenses as those add up over time (contact rinse solution, bandages, chiropractor, eye glasses, contacts, etc.). For a full list of eligible expenses, you can review IRS Publication 502 starting at Page 5.
For more detailed information on to handle Health Saving Accounts and taxes, contact your ShindelRock tax professional.