How to Report an HSA on Your Tax Return

Health Savings Accounts (HSAs) offer a tax-advantaged way to save for healthcare expenses when paired with a High Deductible Health Plan (HDHP). Accurate reporting of HSA activity on your tax return is important for compliance with Internal Revenue Service (IRS) regulations. This ensures contributions meet established limits and distributions are used for qualified medical expenses, maintaining the account’s tax benefits.

Required Information for HSA Reporting

Contributions to your HSA can originate from several sources, including employer contributions, employee contributions made through payroll deductions, and direct contributions you make yourself. For 2024, the annual contribution limit for an individual is $4,150, while for a family, it is $8,300.

Individuals aged 55 and over can make an additional catch-up contribution of $1,000 annually. The “last-month rule” allows individuals who become eligible for an HDHP on the first day of the last month of their tax year (December 1 for most) to contribute the full annual amount, provided they remain HDHP-eligible for the entire following year. Form W-2, Box 12, Code W, reports employer contributions and employee contributions made through payroll deductions.

All contributions, including direct contributions, are reported on Form 5498-SA, which your HSA trustee sends to you and the IRS by May 31 of the following year. This form provides a summary of all amounts deposited into your HSA during the tax year.

Distributions from your HSA are tax-free if used for qualified medical expenses, as defined by IRS Publication 502. These expenses include medical care, prescription drugs, and certain long-term care services. If funds are withdrawn for non-qualified expenses and you are under age 65, the distribution is subject to income tax and an additional 20% penalty.

Form 1099-SA reports all distributions made from your HSA during the year. This form indicates the total amount distributed and whether the distribution was normal, an excess contribution, or a rollover. Maintaining detailed records of all qualified medical expenses paid from your HSA is important, even though these records are not submitted with your tax return. These records support your claims in case of an IRS inquiry.

Completing Form 8889

The next step involves accurately completing IRS Form 8889. This form is available on the IRS website or through various tax preparation software programs. It serves as the primary document for reporting all HSA activity for the tax year.

Part I of Form 8889 focuses on your HSA contributions and the resulting deduction. You will enter the total contributions made for the year, including amounts reported in Box 12, Code W of your Form W-2, and any direct contributions you made. The total contributions shown on Form 5498-SA should align with the amount you enter here. The form guides you through a calculation to determine your allowable HSA deduction based on contribution limits and your eligibility.

Part II addresses distributions from your HSA. Here, you will report the total distributions received during the year, as indicated on your Form 1099-SA. You must then specify the amount of these distributions that was used for qualified medical expenses. The form will automatically calculate any taxable portion of your distributions and apply the 20% penalty if non-qualified distributions were made by an individual under age 65.

Part III of Form 8889 addresses excess contributions. If your total contributions for the year exceeded the allowable limits, this section helps determine the amount of the excess. It also outlines how to handle these amounts to avoid potential excise taxes.

The final figures from Form 8889 integrate directly with your main income tax return, Form 1040. The deductible amount calculated in Part I reduces your adjusted gross income, appearing on Schedule 1. Any taxable income or penalties from non-qualified distributions determined in Part II are also carried over to Form 1040, affecting your overall tax liability.

Addressing Specific Reporting Scenarios

If you contribute more to your HSA than the annual limit allows, these are considered excess contributions. To avoid a 6% excise tax on these amounts, you should remove any excess contributions, along with any earnings attributable to them, by the tax filing deadline for that year, including extensions.

Uncorrected excess contributions remain subject to the excise tax each year they stay in the account. Rollovers or trustee-to-trustee transfers of HSA funds are not considered taxable distributions and do not count against annual contribution limits. While these transfers may sometimes appear on Form 1099-SA, they are indicated with a specific distribution code that signifies a non-taxable event.

Changes in your eligibility for a High Deductible Health Plan (HDHP) during the year can impact your maximum allowable HSA contributions. For instance, if you lose HDHP coverage mid-year, your contribution limit is prorated based on the number of months you were eligible. The “last-month rule” exception still requires you to maintain HDHP eligibility for the entire following year to avoid potential income inclusion and a 10% penalty on the full-year contribution amount from the prior year.