How to Claim the Federal Tax Deduction for an HSA Contribution

By: Ryan Cockerham | Updated December 27, 2018

A health savings account, also referred to as an HSA, provides individuals with a tax-sheltered haven in which they can safely store funds for medical emergencies and other costly health-related expenses. Much like an employer-sponsored pension plan, HSA accounts can accept contributions from both the employee and the employer. Depending upon the specific arrangement you have with your employer, your HSA account has the potential to become an absolutely invaluable financial resource. Given the fact that qualified contributions from your employer to your HSA account are not considered part of your taxable income, you will be able to withdraw funds from your HSA when you need them most without fear of heavy tax penalties.

Additionally, contributions you have made to your HSA out-of-pocket are tax deductible. This process is made possible through a series of federal tax deductions that individuals can claim on an annual basis. Understanding how to obtain the HSA contribution deduction is absolutely critical if you are seriously considering creating one of these accounts.

Tip

You can claim federal tax deductions on your HSA contributions by using IRS Form 8889. The information provided on this form, combined with your Form 1040, will allow you to claim deductions on out-of-pocket contribution to your HSA.

Exploring the Basics of a Health Savings Account

Health savings accounts are commonly available to individuals who have high-deductible health plans, also referred to as HDHPs. The primary objective of a health savings account is to provide these individuals with an additional source of income to fund health costs that cannot be covered due to limitations imposed by their plan. Health savings accounts are often compared to flexible spending accounts, or FSAs. That being said, there are distinct differences between these two plans. One of the unique factors of the HSA that is not incorporated into the FSA is the ability to roll over unused funds on a yearly basis.

Whereas money contributed to an FSA can no longer be accessed after one year, funds in an HSA remain present until they are spent. Because of this, health savings accounts can act as a long-term safeguard for individuals whose current health care offerings are less than optimal. Supporters and advocates of HSAs argue that these accounts will help slow the growth of health care costs and ensure the individuals have the resources they need to access care when it is needed.

Evaluating HSA Contributions

When an individual applies for a high deductible health plan through their health insurance provider, it is not uncommon for the insurance company to offer them the opportunity to establish an HSA. Before the account can be finalized, the applicant must pass a series of requirements established by the IRS. The applicant must currently have a high deductible health plan, must have not obtained any other health care coverage and cannot be claimed as a dependent on another individual's tax return. Finally, the applicant must not currently be enrolled in Medicare.

Once the account has been established, certain contribution requirements must be observed. For example, the 2018 annual contribution limit for HSA accounts was $3,450 for those with single medical coverage. Even if an individual would like to contribute more than this sum to their account, they are unable to do so without incurring fines and penalties. Contributions in excess of the contribution limit will be taxed at a rate of 6 percent and will not qualify as a tax-deductible on the individual's tax return.

When the time has come to access funds inside of an HSA account, individuals will not be taxed on their withdrawals if the funds are used to directly cover the costs of medical expenses that are not explicitly covered by their HDHP. For example, common expenses that HSAs are used to pay for include dental visits and prescriptions, among others. In the event that an individual chooses to use their HSA funds to pay for non-qualified expenses (medical or otherwise), they will incur significant penalties. Failure to use these funds as intended can result in a 20 percent tax penalty as well as exposing the distributed funds to income tax regulations.

Documenting Your HSA Contribution Deductions

Any contributions you have made to your HSA which have been "out-of-pocket," i.e directly from you instead of your employer, will qualify as a tax-deductible. In order to document these contributions, you can use IRS Form 8889. Here, you will have the opportunity to list separately the contributions you have made to your HSA and the contributions your employer has made. After completing the instructions provided, you will find your maximum deductible amount on Line 13. Once you begin completing your income tax return with IRS Form 1040, you will input the figure on Line 13 of Form 8889 into 1040 line 25. Once this process has been completed, you will be able to successfully claim a deduction on your out-of-pocket HSA expenses.

Strategies for Maximizing Deductions

Given the fact that contribution limits do exist for your HSA, you may need to think strategically if you are attempting to maximize your deduction. If, for example, your employer contributes up to 90 percent of the maximum allowed amount into your HSA, you will not have the ability to contribute more than 10 percent of the total. Scenarios such as this can effectively limit your deduction opportunities. With that in mind, you may need to carefully scrutinize your options to determine what the perfect balance of contributions will be for your particular financial scenario.

As always, if you have any questions about your HSA it is in your best interest to discuss these directly with your employer, health insurance provider or a financial advisor. Any of these professionals should be able to help you clearly understand what your responsibilities are when it comes to documenting your contributions and making eligible withdrawals. Given the immense benefits offered by HSA accounts, you should always ensure that you are using these accounts in the most efficient and beneficial way possible. Thanks to HSA accounts, individuals using HDHPs have a much-needed backstop against financial hardship from medical bills.

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About the Author

Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.

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