Health Savings Account (HSA) Tax Deduction Rules & Benefits

Contributing to a Health Savings Account can help you lower your taxable income

Part of your preparation for tax season should include an inventory of all deductions for which you might be eligible. A review of the costs associated with each key area of your life, including work, education, children, and health, can help clarify areas that may help reduce your taxable income. A significant deduction source is a health savings account or HSA.

What is a Health Savings Account?

An HSA is a tax-exempt account used to pay or reimburse qualified medical expenses that generally would be eligible for the medical and dental expenses deduction. The amounts contributed to an HSA gain interest tax-free, and the account stays with you even if you change employers or leave the workforce. Unused funds carry over to the next year and there is no time limit on when the funds must be used, unlike a Flexible Spending Account in which funds are forfeited at the end of the year.

An HSA is set up by a qualified entity such as a bank, insurance company, or anyone approved by the IRS to be a trustee of Individual Retirement Arrangements (IRA). HSAs can only be established for individuals who qualify. There is no such thing as a joint HSA for married couples.

Are HSA contributions tax deductible?

In short, contributions to an HSA made by you or your employer may be claimed as tax deductions, even if you don’t itemize deductions on a Schedule A (Form 1040). Additionally, contributions made by your employer may be tax-free and excluded from your gross income.

Who qualifies for an HSA?

You must meet the following criteria to qualify for an HSA account: 

• You are covered by a high-deductible health plan (HDHP) on the first day of the month
• You have no other health coverage except worker’s compensation, insurance for a specific disease or illness, a fixed amount of coverage per day for hospitalization
• You are not enrolled in Medicare
• You can’t be claimed as a dependent on someone else’s tax return

HSA contribution limits in 2020

The maximum contribution amounts for 2020 are $3,550 for individuals and $7,100 for families. Taxpayers 55 years of age and older are allowed an additional “catch up” contribution amount of $1,000.

HSA tax benefits

• Contributions to your HSA grow interest tax-free
• If you make contributions on your own you may be able to claim the HSA tax deduction when you file, even if you don’t itemize deductions.
• If your employer contributes to your HSA plan through payroll deductions, those contributions go in tax-free, reducing your gross annual income.
• If you are considering year-end tax planning, you have until the April tax filing deadline to contribute to an HSA for the previous year to reduce your taxable income and potentially qualify for the HSA deduction.

How to claim the HSA tax deduction

Tax-deductible HSA contributions should be reported on Form 8889 and filed with your Form 1040 or Form 1040NR. 

If you or your employer have made contributions to your HSA plan in 2020, make sure you reap the benefits on your tax return when you file.