Before you can deduct your contributions to a health savings account (HSA), you must prepare IRS Form 8889.
Health Savings Accounts
If you are the beneficiary of a health savings account (HSA), then the IRS requires you to prepare Form 8889 with your tax return before you can deduct your contributions to the account. The purpose of the form is to report your deductible contributions, calculate the deduction, report the distributions you take to pay medical expenses and to calculate the tax you must pay on withdrawals you make for non-medical related purposes.
How an HSA works
An HSA allows you to make annual tax-deductible contributions up to $3,850 for individual plans or up to $7,750 for family plans (as of 2023) to help pay out-of-pocket medical expenses in the future. If you are age 55 or older, you can make an additional $1,000 "catch-up" contribution, which is also tax-deductible.
The money grows tax-deferred for as long as it’s held in the account, and all withdrawals you make to pay for qualified medical expenses are tax-free. This means you can pay for your medical expenses with tax-free dollars. However, this money is only tax-free if you file Form 8889 with your tax return.
Qualifying for an HSA
Not all taxpayers are eligible to have an HSA. To qualify, you must be enrolled in a health insurance plan that imposes high deductibles that meet or exceed IRS required amounts. In addition to high deductibles, the plan must impose maximum annual out-of-pocket cost ceilings that also satisfy IRS limitations.
If you have other “first-dollar” medical coverage, enroll in Medicare or are claimed as a dependent on another taxpayer’s return, then you aren’t eligible to use an HSA. However, disability, dental plans, vision, long-term care and catastrophic-disease policies, such as cancer insurance, will not disqualify you from having an HSA.
Using HSA funds
You can use the money in your HSA for a variety of health-related expenses for yourself, your spouse or your dependents, including preventative care, surgery, and even orthodontics. However, you cannot use the money in an HSA to pay medical insurance premiums unless you are paying COBRA coverage after losing your job, or paying premiums while collecting unemployment.
You are allowed to use the money to pay for long-term care insurance and, if enrolled in Medicare, to pay deductibles, co-pays and coinsurance. You must pay tax on any withdrawals you make for non-medical purposes plus an additional 10-percent penalty.
Preparing Form 8889
You must always file a Form 8889 in any year you or an employer contributes money to your HSA or you make withdrawals from the account. The deduction you calculate on Form 8889 is taken on the first page of your income tax return. Since this is an adjustment to your income, there is no requirement that you be eligible to itemize deductions to claim it.
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