Health savings account (HSA) and taxes: What are the HSA tax deduction rules?

Did you know that setting aside funds for healthcare expenses can also help you lower your taxable income? That’s exactly what a health savings account, or HSA, does. Think of an HSA as a special savings account just for medical expenses, but with added tax perks.

Read on as we answer: “How do health savings accounts work?” Then, we’ll cover HSA tax benefits, health savings account rules, and HSA tax forms.

What is a health savings account?

A health savings account, or HSA, is a tax-advantaged account that those with coverage under a high-deductible health plan (HDHP) can use to save for qualified medical expenses and insurance coverage under very specific rules. Contributions are made to the HSA by you or your employer and can’t exceed the HSA contribution limit each tax year.

HSA contributions can be invested over time. HSA distributions can be used to pay for qualified expenses like prescription drugs or any other expense used for the diagnosis, cure, treatment, or prevention of disease or medical treatment. Generally, you cannot treat health insurance premiums as a qualified medical expense. However, HSA contributions can be used to cover premiums for:

• Long-term care insurance
• COBRA health care insurance
• Heath care insurance while you are receiving state or federal unemployment compensation
• Medicare or other health insurance coverage when you are age 65 and over

The contributions are also tax-deductible, as are the account’s earnings and withdrawals for eligible expenses.

HSA tax benefits

Here are some tax benefits of health savings accounts:

Pre-tax contribution:

• The earnings in the account aren’t taxed.
• Contributions made toward your HSA through payroll deductions are excluded from your gross income. In addition, contributions made to your HSA by your employer may be excluded from your employment taxes (like Social Security and Medicare taxes). You will see these reported on your Form W-2.
• You are eligible for a tax deduction for additional contributions you made to your HSA (outside of your payroll deductions). This is true even if you don’t itemize your deductions.

Tax-free growth:

• HSA contributions remain in your account until you use them. HSA funds will accumulate from tax year to tax year if the money is not spent.
• The money deposited into the HSA is not subject to federal income tax when the deposit is made.

Tax-free withdrawals:

• Distributions used to pay for or be reimbursed for qualified medical expenses are tax-free provided they are for expenses you incur after you establish your HSA. HSA funds may be used to pay for qualified medical expenses at any time. For example, you can receive distributions from your HSA even if you are no longer currently eligible to make contributions to your HSA.

Rollover benefits:

• The HSA stays with you if you change employers, keeping your HSA money or investments shielded from tax.

HSA rules for a tax deduction

HSAs can be a powerful tool for managing healthcare costs and saving for future medical expenses, but it’s important to understand the rules and limitations to fully take advantage of the tax benefits they offer. With an HSA tax deduction comes many rules. Here are the top HSA account rules:

• Deposits paid directly to your health savings account (HSA) can result in an HSA tax deduction. However, employer contributions are already excluded from your income on your Form W-2. So, the HSA deduction rules don’t allow an additional deduction for those contributions.
• If you use a health savings account to pay your eligible medical expenses, then you can’t itemize medical deductions for the same expenses. However, if you have enough medical expenses not paid with the HSA, you may be able to claim them as an itemized deduction on your tax return. (Read more about claiming the standard vs. itemized deduction.) In order to itemize, deductible expenses must be more than 7.5% of your adjusted gross income (AGI). An HSA contribution deduction lowers your AGI, which could make it easier for you to pass the 7.5% hurdle.
• If you contribute more than the annual contribution limit set by the Internal Revenue Service (IRS) within a tax year, those excess contributions won’t be tax-deductible. In 2024, the HSA contribution limits are $4,150 for individuals and $8,300 for families. The 2025 limits are $4,300 for individuals and $8,550 for families. Employer HSA contributions count towards the caps. If you’re 55 or older, you can make catch-up contributions of up to $1,000 per year. Your spouse, if age 55 or older, could also make a catch-up contribution, but will need their own account.
• You can’t be someone’s tax dependent to claim a deduction.

HSA withdrawal rules for non-medical expenses

If you need to take money from your HSA for something other than a qualified HSA expense, you could face penalties. Any withdrawal for a non-medical purpose is taxed as regular income. On top of that, there’s a 20 % tax on the amount withdrawn.

Once you turn 65, you can withdraw money from your HSA for any reason without penalty. But for the distribution to be tax- and penalty-free, it must be used for qualified medical expenses. If you use the funds for other purposes, the amount withdrawn will be subject to regular income taxes.

HSA tax forms

Now that you’ve read up on HSA rules, you’re probably curious about HSA tax forms to complete come tax time. The HSA tax forms are IRS Form 1099-SA, 5498-SA, and IRS Form 8889. Here’s the need-to-knows of each form:

• Form 1099-SA is an informational tax return and displays how much of your HSA funds are spent within the year. It can be downloaded from your HSA provider. Use the information listed in your 1099-SA form to fill out IRS tax form 8889.
• Form 5498-SA is also an informational tax return and shows how much money you contributed during the year to your HSA and the fair market value of the amount in your HSA for the tax year.
• Form 8889 is submitted with your tax return via Form 1040 or Form 1040-SR to report a distribution from the account, even if it’s not taxable. If you took a taxable distribution from your HSA, this is where you report that. You also report contributions and any deductions related to your HSA on this form. (Form 8889 is the only HSA tax form you must submit with your federal income taxes.)

More help with HSA and taxes

For more help navigating the ropes of HSA rules, get the help of a tax pro at H&R Block. Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.