According to the Internal Revenue Service (IRS), an HSA is a tax-exempt custodial or trust account that’s set up with a trustee. Distributions aren’t taxed as long as you use the money to pay for qualified medical expenses.
Qualifying Rules for HSAs
Eligibility rules require that you be enrolled in a high-deductible health insurance plan to qualify for an HSA. The high-deductible plan must meet certain requirements. For 2022, the minimum annual deductible limit is $1,400 for self-only coverage ($1,500 for 2023) and $2,800 for family coverage ($3,000 for 2023). There are no income limitations to qualify for health savings accounts, unlike individual retirement accounts (IRAs), which do have income limits.
Contribution Limits for HSAs
There’s a cap on how much you can contribute each year when it comes to health savings accounts. The contribution limits to HSAs for those under a high deductible plan are as follows:
For 2022, contribution limits to HSAs are $3,650 for self-only coverage and $7,300 for those with family coverage.For 2023, contribution limits to HSAs are $3,850 for self-only coverage and $7,750 for those with family coverage.
Contributions made by your employer count toward these limits. Those who are age 55 or older can contribute an additional $1,000. This “catch-up” contribution isn’t indexed for inflation, so it’s the same amount from year to year. Plus, you can make this additional contribution at any time during the year.
Tax Treatment for HSA Contributions
Contributions to an HSA are tax-deductible on your Form 1040 tax return as an adjustment to income. However, you don’t have to take them as an itemized deduction for medical expenses, which is advantageous because itemized medical deductions are limited to expenses paid in excess of 7.5% of your adjusted gross income in the tax year 2022. Contributions for a particular tax year are due by the same day as the filing deadline for your tax return, which is usually April 15, unless this date falls on a weekend or a holiday or is otherwise extended.
Earnings Are Tax-Exempt
Earnings, such as interest and dividends from the money contributed to an HSA, are tax-exempt at the federal level. Interest or other investment income earned on the contributions are not included in your tax return.
Withdrawing From Your HSA
Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses. “Qualified” expenses are detailed in IRS Publication 502, Medical and Dental Expenses. They include most medical costs, from birth control pills to guide dogs to surgery. They also include mileage traveling to and from treatment, but not costs associated with items that are just considered “healthy,” like vitamins or gym memberships. Qualified expenses include costs incurred on behalf of yourself, as well as your spouse and any dependents.
Using an HSA as a Tax-Planning Tool
HSAs accumulate earnings and income without being subject to forfeiture the way flexible spending accounts are if they’re not used. Money held inside an HSA can be withdrawn at any time for qualified medical expenses, so an HSA can be used to accumulate tax-free income for use later in life. You can build tax-free savings for future medical expenses as you age.
How To Claim the Deduction
Financial institutions report HSA contributions on IRS Form 5498-SA, which is sent to both the taxpayer and the IRS. You can then report your tax-deductible HSA contributions on Form 8889, with the total contributions transferred to and reported on your Form 1040.
