Filing your taxes with an HSA

You know that HSAs are great for saving for retirement, both future and current medical costs, and much more. But what about filing taxes with an HSA?

Tax time isn’t an officially recognized season, but that doesn’t stop me from calling it The Procrastination Season! It’s that time of year when you have everything you need to complete your income tax return… but you just can’t bring yourself to do it. Sound familiar? Welcome to the club! 

Membership is not exclusive and there are no real benefits, besides getting to watch a lot of Netflix while you’re putting off what you should really be doing.

As you think (operative word here being think) about your taxes, don’t forget about your health savings account (HSA). We often tell you that HSAs are about the best vehicle for saving for future medical and retirement costs, as well as saving on medical expenses in the here and now. But what makes these accounts so amazing is their tax treatment… and anything that has “tax treatment” falls under the purview of the IRS.

Health Savings Accounts and the IRS

Here’s a little secret: the IRS is the only thing that makes your HSA different from a regular checking or savings account. Your HSA comes with a debit card that helps make it easier to spend when you need, and it also enables you to invest your funds when you want. An added bonus? If you utilize this account’s pre-payroll-deduction capability, the funds that come out of your account don’t have income taxes applied, and neither does money coming out of it. Cha-ching!

So, as you can imagine, you need to be sure to include your HSA activity on your annual income tax return. Here’s what you need to know.

Tax Forms

There are two tax forms that most people will receive in relation to their HSA, both of which are provided by your HSA-provider.

• Form 1099–SA – This form records your “distributions”—anything you spend or otherwise withdraw from your HSA.
• Form 5498-SA – This form records your “contributions”—anything you deposit into your HSA each tax year.

Form 1099–SA: Distributions from an HSA, Archer MSA, or Medicare Advantage MSA

“Distribution” in this case can simply be defined as any money that comes out of your HSA, period. So, as you can probably guess, the 1099-SA gives you the sum-total of money that came out of your HSA, either through a debit card purchase, reimbursement request, or just plain withdrawal, in a given tax year.

Why do you need to know this information for filing your taxes?

I know, I know, we can sound like a broken record with how often we remind you that your HSA enables you to save and spend money for health expenses, all tax-free. But these reminders are pertinent! Anything to do with taxes is important to the IRS, and if something is important to the IRS, there’s probably a form for it, sometimes two, often three…

In the case of HSAs, the 1099-SA is what your HSA provider gives you to help show that the money you used out of your HSA should remain free from your total income for purposes of paying your taxes—or, as is sometimes the case, to let the IRS know that some of what you withdrew from your HSA should be taxed.

As with most other forms required for filing, you will receive a copy of your 1099-SA with a postmark no later than January 31 of the year after the tax year for which you are filing (example: Jan. 31 2021 for 2020 tax year). If you have no distributions to report for the entire year, then congratulations! You do not need to file form 1099-SA and will not receive a copy of it.

If you did have distributions during the tax year, you will want to pair this form with your receipts so that you can show the IRS an itemized accounting of your qualifying expenses. Most tax-filing programs can make the calculations automatically so that you know how your expenditures will impact your overall taxable income and, as a result, what you owe. In the case of HSAs, this is usually good news!

One more important thing about 1099-SAs: Form 1099-SA is not an itemized list of qualified medical expenses paid out from your HSA. It’s a total amount of distributions made from your HSA during a tax year. Hopefully your HSA provider lets you save receipts (like Starship!) to make it easier to track these purchases. If not make sure to save your receipts throughout the year. And be sure to check the numbers on your 1099-SA against your own records prior to filing your taxes. It is your responsibility to provide accurate accounting of qualified medical expenses and HSA distributions to the IRS.

Form 5498-SA: HSA, Archer MSA, or Medicare Advantage MSA Information

Whereas form 1099-SA is concerned with distributions and whether or not they’re taxable, form 5498-SA is concerned with your contributions to your HSA.

The good news is that you usually don’t have to file it with your tax return. This optionality exists because you usually don’t get it until after the April tax-filing deadline, since you have until that tax filing deadline to continue making contributions toward your previous year’s annual contribution limit. The annual limit on HSA contributions in 2024 is $4,150 for individuals and $8,300 for families.

Your HSA provider should give you a copy of your 5498-SA form by May 31 of every year. Again, if you didn’t make any contributions for the previous year, you won’t get a form.

What if I used my HSA for non-qualified expenses?

Say you use funds from your HSA for something other than qualified medical expenses. Well, theoretically, that’s OK—it’s your money, after all. But once you use those funds for something other than qualifying expenses, the tax preference goes away… and the IRS makes you pay.

In this case, you will need to file form 8889, which allows you to list the ineligible purchases you have made.

Here are some examples of scenarios that would incur a penalty for early withdrawal:

Most modern tax-filing services will automatically fill out this form for you based on the information you provide from your 1099-SA. But you will still need to show your expenses to prove that they are qualified.

So there you have it! If this felt like a lot of information, give it a second read. This type of thing tends to clear up with a second glance. There are three forms in play here, and usually, only one that requires you to add any information. That’s not actually a whole lot of effort for something with so many tax savings and investment benefits, right? You might even say it’s worth not procrastinating over! 😉