Can I Use My HSA for My Child Who Is Not a Dependent?

Health Savings Accounts (HSAs) provide a tax-advantaged way to save for medical expenses, making them an appealing option for many individuals. However, questions often arise about eligible expenses, especially when using HSA funds for children who are not considered dependents.

IRS Dependent Criteria

Understanding the IRS criteria for dependents is crucial when determining whether you can use HSA funds for a child who is not a dependent. The IRS defines a dependent as either a qualifying child or a qualifying relative, each with specific requirements. A qualifying child must be under 19 (or under 24 if a full-time student) and live with you for more than half the year. Additionally, they must not provide more than half of their own financial support.

For a qualifying relative, the criteria differ. They do not need to live with you, but their gross income must fall below an annually adjusted threshold—$4,700 for 2024. You must also provide more than half of their financial support during the year. These rules determine whether your child qualifies as a dependent for tax purposes, impacting whether their medical expenses can be covered by HSA funds.

Qualified Medical Expenses

Qualified medical expenses allow HSA holders to cover healthcare costs tax-free. These expenses must meet the criteria outlined in IRS Publication 502, which includes payments for diagnosis, treatment, or prevention of disease, as well as services like doctor visits, surgeries, prescription medications, and dental care.

Certain alternative treatments, such as acupuncture and chiropractic services, may qualify if prescribed by a healthcare professional. However, cosmetic procedures, general health supplements, and gym memberships typically do not. To ensure compliance and maximize the benefits of your HSA, consult the latest IRS guidelines or seek professional advice.

Tax Consequences for Non-Dependent Expenses

Using HSA funds for non-dependent expenses can lead to significant tax consequences. The IRS allows HSA funds to cover qualified medical expenses only for the account holder, their spouse, and dependents. If funds are used for a child who does not meet dependency criteria, the withdrawal becomes taxable and incurs a 20% penalty.

For example, withdrawing $2,000 for a non-dependent child’s medical expenses would result in that amount being taxed as income, along with a $400 penalty. These financial consequences reduce the advantages of HSAs, underscoring the importance of evaluating whether an expense is eligible before withdrawing funds.

Documentation for HSA Distributions

Proper documentation is essential to ensure compliance when using HSA funds. The IRS requires account holders to keep records proving that medical expenses paid with HSA money are eligible. This includes maintaining receipts, invoices, and payment records that specify the date of service, provider’s name, and amount paid.

Thorough record-keeping is especially important for complex or less conventional treatments that may not immediately appear as qualified medical expenses. In such cases, additional support, such as a letter from the healthcare provider, may be necessary to justify the expense. Having complete documentation readily available can prevent complications in the event of an IRS inquiry.