How To Reap Tax Breaks From Your HSA
HSA | Taxes | Deduction | Health care | April 17, 2024
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“The struggle you're in today is developing the strength you need tomorrow”
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Health-savings accounts offer remarkable benefits. But the nuts and bolts of using them are often confusing.
So it’s no surprise that the last Tax Report, which explored unusual features of HSAs, prompted a flood of reader questions. With open-enrollment for healthcare plans coming soon, many of these questions are worth further attention.
First, some basics: HSAs are tax-free funds paired with qualified high-deductible, health-insurance plans. Many employers offer such coverage, sometimes with subsidies, and individuals can purchase it as well.
The funds in HSAs can either be withdrawn to cover unreimbursed medical expenses or left in the account and invested for tax-free growth. For 2023, the maximum HSA contribution is $7,750 for family coverage and $3,850 for an individual, plus an additional $1,000 for HSA owners age 55 and older.
For many people, the two best HSA benefits are the tax savings and the flexibility. Handled correctly, HSA funds are triple tax-free: no tax going in, tax-free growth, and tax-free withdrawal, which is better than traditional or Roth IRAs.
The tax-free withdrawals kick in so long as the account owner saves receipts proving eligible health-related expenses. Reimbursements can even be claimed years later, when the owner needs ready tax-free cash.
Another surprising HSA feature is the savings head-start they can provide to young adult children (under age 26) still covered by their parents’ high-deductible plans. If the parents don’t claim these children as dependents on their tax returns, the child can contribute up to $7,750 in 2023 to his or her own HSA.
For more on HSA basics, see the prior Tax Report. Here are answers to readers’ questions.
Who is eligible to make contributions to an HSA?
The main requirements are that someone must be covered by an HSA-qualified, high-deductible health plan; not be enrolled in Medicare; not receive other disqualifying coverage, such as through a spouse’s non-HSA plan or Flexible Spending Account; and not be claimed as a dependent on someone else’s tax return. For more, see IRS Publication 969.
Can I contribute both to an HSA and a Flexible Spending account in the same year?
In general, no. Exceptions apply for limited-purpose FSAs for dental or vision care.
How do I claim reimbursements for expenses from an HSA?
Unlike with payouts from Flexible Spending Accounts, an HSA owner doesn’t have to submit receipts but must be able to produce them if asked. The financial institution holding the HSA sends an IRS Form 1099-SA showing total HSA withdrawals for the year, and the HSA owner reports them to the IRS on IRS Form 8889 of the tax return.
I’m enrolled in Medicare but my spouse isn’t. Can she contribute to an HSA?
Yes. If she meets the eligibility requirements described above, then she could contribute to an HSA.
If one spouse has an HSA, can its funds be used to reimburse the other’s health expenses?
Yes—even if the other spouse has his or her own HSA. An HSA owner can also receive payouts for expenses for someone claimed as a dependent on his or her tax return.
I own a business reported on Schedule C. Can I contribute to an HSA?
Yes, if you meet the eligibility requirements described above.
If I get reimbursements for health expenses from an HSA, can I also take a medical-expenses deduction for those costs on Schedule A or get reimbursed for them from a Flexible Spending Account?
No! Each benefit is only for unreimbursed expenses, with no double or triple dipping allowed. However, someone could receive payouts from both an HSA and an FSA in the same year, as long as they are for different expenses.
Can HSA funds be used for Medicare or Cobra premiums?
HSA reimbursements can be claimed for Medicare Part B and Part D premiums, and also for Medicare Advantage premiums. They cannot be claimed for Medigap supplemental coverage. (As noted above, people enrolled in Medicare can’t contribute to an HSA, but they can take payouts from an existing one.)
HSA payouts can also be claimed for Cobra premiums, which are amounts paid for health coverage through a prior employer.
My 23-year-old daughter is no longer my tax dependent but she’s still covered by my high-deductible health plan, and I contribute to my own HSA. Your earlier story said she can have her own HSA and contribute up to $7,750 for 2023. But my HSA provider said this is incorrect. Who’s right?
HSA specialist Roy Ramthun says the criteria enabling your daughter’s HSA contribution at a family level of $7,750 for 2023 are listed in Sections 223(b) and 223(c) of the Internal Revenue Code. While this benefit may be a drafting glitch that Congress could lower, it has been in the law since 2003.
Spokespeople for Fidelity Investments, HealthEquity and Lively say they provide HSAs to qualified persons such as your daughter, even if the parents’ HSA has a different sponsor. To find other providers, check HSASearch.com or a local financial institution.
If someone (such as a 20-something) is given money to fund an HSA, does the young person get an income-tax deduction for the contribution?
Yes, the account owner gets the deduction. So a parent could make a nontaxable gift to a child, who then uses that money to fund an HSA and reap a deduction.
My employer’s HSA provider has high fees and limited investment choices. Do I have options?
Yes. Mr. Ramthun advises not to close the account with your employer. Rather, consider opening an account with another HSA provider and moving assets from the current HSA into it. This is allowed by law.
Do HSA contributions qualify for state income-tax deductions?
In general, yes—except in California and New Jersey, which don’t give a deduction for the contribution. If the employer picks up part of the HSA contribution, that’s added back to state taxable income as well.
Dividends, interest and capital gains earned inside the HSA are also taxable in California and New Jersey—at least in theory.
“I doubt if even 5% of tax preparers get this right,” says Kenneth Bagner, a CPA and tax chair at Sobel & Co. a New Jersey-based firm.
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Appeared in the October 15, 2022, print edition as 'You Had HSA Tax Questions. We’ve Got the Answers.'.
Credit goes to Laura Saunders, published October 14, 2022 in the Wall Street Journal.
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This Week’s Author, Belinda Stickle