What Is Form 8853 and When Do You Need to File It?

Tax forms can be confusing, and Form 8853 is one that many taxpayers may not recognize until they need to file it. This form is used to report distributions from certain medical savings accounts (MSAs) and long-term care insurance contracts. Failing to file when required could result in tax penalties or unexpected liabilities.

Understanding when this form applies is essential for staying compliant with IRS rules.

Purpose and Usage

Form 8853 ensures that financial transactions related to healthcare accounts and insurance policies are properly reported to the IRS. It tracks taxable and non-taxable distributions, helping taxpayers determine whether they owe additional taxes or qualify for exemptions. Without this documentation, individuals might misreport income, leading to potential audits or penalties.

The form helps the IRS oversee tax-advantaged accounts used for medical expenses. These accounts allow tax-free contributions or withdrawals under specific conditions, but improper use—such as withdrawing funds for non-medical purposes—can trigger income tax and penalties. Properly completing Form 8853 ensures that only eligible expenses receive tax benefits.

The IRS also uses this data to monitor healthcare-related tax benefits and prevent fraudulent claims, maintaining the integrity of tax-advantaged accounts.

Key Parts of Form 8853

Form 8853 is divided into sections covering Medical Savings Accounts (MSAs), long-term care (LTC) insurance contracts, and certain other distributions. Each section requires specific details to ensure accurate tax reporting.

Medical Savings Accounts

MSAs are tax-advantaged accounts for individuals with high-deductible health plans (HDHPs) to save for medical expenses. Taxpayers must report distributions from these accounts to determine whether they are taxable. If funds are used for qualified medical expenses, they remain tax-free. However, non-qualified withdrawals are subject to income tax and a 20% penalty unless the account holder is disabled or over 65.

Taxpayers must report the total distribution amount, the portion used for medical expenses, and any excess contributions. Excess contributions not withdrawn by the tax return due date may be subject to a 6% excise tax. If an MSA holder dies, the account balance may be taxable to the beneficiary, depending on their relationship to the deceased. Proper documentation is necessary to avoid misreporting and penalties.

Reporting LTC Contracts

LTC insurance contracts provide financial assistance for extended medical care, such as nursing home stays or in-home assistance. Form 8853 is used to report benefits from these policies and classify them for tax purposes.

Generally, LTC benefits are not taxable if they do not exceed the IRS per diem limit, which is adjusted annually. For 2023, this limit was $420 per day. If benefits exceed this threshold, the excess may be taxable.

Taxpayers must report the total benefits received and compare them to actual medical expenses. If the policy reimburses only actual expenses, the benefits are typically not taxable. However, if the policy provides a fixed daily benefit, any amount exceeding qualified expenses could be taxed. Completing this section correctly ensures accurate income reporting.

Other Distributions

Form 8853 also covers other distributions with tax consequences, including Archer MSA rollovers. Rollovers must be reported to confirm that funds were transferred correctly to another qualifying account. If a rollover is not completed within 60 days, the amount may be treated as a taxable distribution.

Death benefits from LTC contracts must also be reported. If a beneficiary receives a lump sum payment, the tax treatment depends on whether the benefits were previously excluded from income. In some cases, a portion of the payout may be taxable.

Taxpayers should review their financial records to ensure all distributions are reported accurately. Errors could result in unexpected tax liabilities or IRS scrutiny.

Tax Implications

Distributions and benefits reported on Form 8853 can have different tax treatments depending on the source of funds and how they are used. Some amounts may be fully excluded from income, while others could be taxable.

The IRS determines taxability based on whether the funds received exceed certain thresholds or are used for non-qualified purposes. For example, if LTC contract payments surpass the IRS per diem limit, the excess may be taxable. Similarly, improper handling of account rollovers can result in the entire balance becoming subject to income tax and penalties.

State taxation may also apply. While federal tax rules govern Form 8853, some states have additional regulations regarding medical-related distributions and benefits. Taxpayers should check their state’s tax laws to determine if additional reporting or payments are required.

Filing Process

Form 8853 must be attached to an individual’s federal income tax return, typically Form 1040 or 1040-SR. Since the information reported can impact adjusted gross income (AGI) and tax liability, taxpayers should review all figures carefully before submission.

Documentation is essential. Taxpayers should keep records of distributions, including bank statements, insurer-issued benefit summaries, and receipts for eligible expenses. The IRS may request supporting evidence if discrepancies arise. Keeping organized financial records can prevent filing delays and reduce the risk of errors.

For those using tax software, Form 8853 is often included as an optional schedule. However, automated systems may not always categorize distributions or benefits correctly, particularly in complex cases. Reviewing the form manually before e-filing or mailing a return ensures accuracy.

Common Errors

Mistakes on Form 8853 can lead to misreported income, penalties, or IRS scrutiny. Many errors stem from misunderstandings about what qualifies as a tax-free distribution or how to report benefits.

One frequent mistake is failing to differentiate between taxable and non-taxable distributions. If a taxpayer withdraws MSA funds for non-medical expenses but does not report the amount as taxable income, they may face additional taxes and penalties. Similarly, errors occur when individuals exceed LTC insurance benefit limits without accounting for the taxable portion.

Another common issue is incorrectly classifying rollovers. If a rollover is not completed within the required timeframe or is mistakenly reported as a regular distribution, it may be subject to income tax and penalties.

Ensuring accuracy when completing Form 8853 helps taxpayers avoid unnecessary complications and potential IRS audits.