Ask Penny: What do I need to know about filing taxes if I have an HSA?

February 27, 2020

There's no "one-size-fits-all" when it comes to preparing taxes, but contributing to a Health Savings Account (HSA) won’t add much complexity to your tax situation. Tracking down the right forms is the best place to start.

Forms You’ll Need

• Form W-2 - If you work for someone else, you should receive a W-2. This form includes a breakdown of your income, including what part of your earnings was put into your HSA.
• Form 5498-SA - When you put money into an HSA, the IRS wants to know about it and that’s the purpose of Form 5498-SA. You can make HSA contributions until the tax deadline, so this form shows up later — possibly even by the end of May. A copy goes to both you and the IRS.
• Form 1099-SA – Any withdrawals or distributions from an HSA (which can be paid directly to a medical service provider or account holder) will be reported on this form, which is provided by your HSA custodian.

The three forms above track your activity for the year. Once you have them handy, it's easy for you (or your tax software!) to complete these two:

• Form 5329 - There is a strict annual limit for HSA contributions. If you contributed too much in 2019, you’ll need to fill out Form 5329 (the IRS charges a 6% tax on the extra amount).
• Form 8889 – This form includes the year's HSA contributions and withdrawals.

What next?

Now that you have gathered the necessary tax forms, it’s time to file! HSA contributions are reported on Line 25 of Form 1040. If you use a tax software, it will ask you a few questions and use your answers to calculate the number that goes on Line 25.

If you do your taxes with paper and pencil, figuring out what goes on Line 25 is still pretty straightforward. You'll use Form 8889 (instructions here). Part I is where you report contributions to your HSA, and Part II is where you report distributions (withdrawals).

The HSA contributions that you made directly to your HSA (outside of your employer's payroll system) are reported on Line 2. If HSA contributions were deducted from your paycheck and/or your employer contributed on your behalf, those contributions should be listed on Line 9. Note that a one-time IRA-to-HSA rollover will be reported on Line 10 if applicable.

Although funding sources for your HSA are reported on different lines, the total amount can't exceed the maximum contribution limit for the year. In 2019, the cap was $3,500 for an individual and $7,000 for a family. If you're aged 55 or older, the cap is $1,000 higher and that adjustment is made on Line 3.

Part II of Form 8889 only applies if you took money out of your HSA during the year to pay for medical expenses (including withdrawing excess contributions if necessary). If you don’t have any distributions and are letting your HSA money grow, Part II might be all zeros.

The amount you withdrew from your HSA goes on Line 14, and the portion of the withdrawals that you used for qualified healthcare expenses goes on Line 15. Make sure you have receipts to document all of the bills you paid with HSA funds — you'll need them if you're ever audited.

If you withdrew money from your HSA for anything other than qualified healthcare expenses, you'll have to pay income tax on that money. If you're under 65, you'll probably also have to pay an additional 20% tax, which is calculated on Line 17 of Form 8889. As long as all HSA distributions were used for qualified expenses, you'll have zeros on the lines pertaining to taxable distributions and additional tax.

That’s all there is to it! Form 8889 takes just a few minutes to complete by hand, and tax software will do it for you after you answer a few basic questions. If you have the correction documentation, stick to the rules for maximum contribution amounts, and withdraw funds only to pay for qualified medical expenses, your HSA tax reporting won't be too taxing.

Always reach out to a professional tax preparer if you have any questions about your specific situation. As HSAs offer three different tax benefits, the IRS is eager to stay on top of any moves you make. But don't let a fear of complicated taxes prevent you from taking advantage of the many benefits they provide.