Are Health Savings Accounts Tax Deductible?

Charday Penn / Getty Images

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

An HSA is a savings account that allows you to set aside pre-tax funds to cover qualified medical expenses. You can potentially pay for copayments, insurance coverage or deductibles from this account without having to tap into your savings. 

If used correctly, HSAs can give you a triple-tax advantage. Here’s what you need to know.

Who Can Open an HSA?

You do have to meet certain eligibility requirements to open an HSA account. They are: 

• Enrollment in a high deductible health plan: This is a medical insurance plan that has lower premiums, but higher deductibles. For 2024, a medical plan is considered a HDHP as long as it has a deductible of $1,600 for individuals and $3,200 for families. The 2025 minimum deductible amount  is $1,650 for individuals and $3,300 for families. 
• No other health coverage: You cannot be covered by another health plan that is not an HDHP. 
• No Medicare enrollment: You cannot be enrolled in Medicare. 
• Not a dependent: Another individual cannot claim you as a dependent on their tax return. 

What Are the Benefits of an HSA?

An HSA has several benefits that can help your pocketbook in unexpected ways. Here are some key benefits:

1. Triple Tax Advantage 

• Tax-deductible: Contributions to an HSA are tax-deductible. 
• Growth without tax liability: Any interest on the earnings in your HSA account grows tax free. 
• Tax-free withdrawals: Any withdrawal for a qualified medical expense is not subject to federal income tax. 

2. Portable Account

Your HSA account always belongs to you. Even if you switch employers or retire, your HSA account stays with you. Unused funds roll over and can be saved for future expenses. 

3. Investment Options

Once your account reaches a certain account balance (as determined by your provider), you are free to invest your HSA funds in stocks, mutual funds, bonds or other investment choices. 

4. Benefits During Retirement

After 65, non-medical withdrawals are not subject to a 20% penalty. Although there is not a penalty, you will have to pay income tax on the withdrawal. 

5. Broad Coverage for Medical Expenses

HSA funds offer to cover several kinds of qualified medical expenses. Coverage includes co-payments, dental and vision care, prescriptions and deductibles. 

6. Extends to Dependents

Your HSA funds can cover dependents, including your spouse and children. The coverage only includes qualified medical expenses. 

How To Maximize Tax Benefits

Given the tax advantages and the flexibility of HSA accounts, there are ways individuals and employers can maximize their tax benefits. Let’s take a look at how to maximize benefits:

• Contribute the IRS Limit. Make sure you contribute the maximum allowed by the IRS. For individuals it is $4,150 and $8,300 for families. Those who are 55 and older can add an additional $1,000 as a catch-up contribution. 
• Take advantage of employer contributions. If your employer contributes $1,500, you can contribute $2,650 to max out the contribution limit. 
• Contribute through pre-tax payroll deductions. Set up automatic contributions through your payroll deductions. These contributions are exempt from federal income tax, Social Security and Medicare taxes.
• Invest. Once your account reaches a certain limit, you should invest the funds in stocks, mutual funds and other investments. You can take advantage of tax free growth.
• Contribute after-tax funds. If you’re unable to contribute through your payroll, you can still make after-tax contributions to your HSA, These contributions are tax-deductible. 

2025 HSA Contribution Limits

HSA members can contribute up the annual maximum amount: 

Both the individual and employer can contribute to the HSA account as long as it does not exceed these limits. 

Misconceptions About HSA Accounts

Here are some common misconceptions about HSA accounts: 

Myth No. 1: You lose your HSA funds at the end of the year. 

HSA funds roll over from one year to the next. These funds do not have an expiration date. 

Myth No. 2: Only your employer can contribute to your HSA. 

Although your employer can contribute, you can also contribute too. As long as the contribution by you and your employer doesn’t exceed the IRS limit. 

Myth No. 3: HSA funds can only be used for qualified medical expenses in the United States. 

The funds can be used for any qualified medical expense (as defined by the IRS), whether it happened inside or outside the United States. 

Myth No. 4: You cannot invest your HSA funds. 

Once your HSA account reaches a certain balance (as set by the provider), you can invest the remaining funds in stocks, bonds or mutual funds. 

Myth No. 5. You can only use HSA funds for qualified medical expenses. 

This only true if you are under 65 years old. After age 65, you can use your HSA funds for non-medical expenses. You won’t be penalized for it, but the withdrawal will be taxed as general income. 

How To Report Your HSA Contributions on Your Tax Return

There is a step-by-step process to report your HSA contributions. Follow these guidelines:

1. Gather All Documentation

You will need the following documentation: 

Form 5498-SA: This is a form provided by the HSA administrator. The document reflects the following: 

• Your total contributions to your HSA
• Employers contributions to your HSA 
• This form is not required to be filed with your taxes. The form is for verification purposes.

Form W-2: It reflects your employer’s contributions to your HSA.  

• These amounts will appear in Box 12, coded as W.

Form 1099-SA: This form will show any distributions (withdrawals) from your HSA. 

• It’s needed to report any HSA spending during the year.

2. Complete IRS Form 8889

Form 8889 reports HSA contributions, withdrawals, and determines the HSA deduction. This form must be attached to your federal tax return. You will need to fill out all relevant parts. 

Part I: HSA Contributions and Deductions:

• Line 2: Enter the total HSA contributions you made (excluding employer contributions). This can be found on Form 5498-SA.
• Line 3: Enter the maximum allowable contribution for your coverage (self-only or family). 
• Line 9: Enter the contributions made by your employer (found on Form W-2 in Box 12).
• Line 13: Calculate your HSA deduction. This is the amount you contributed to your HSA, minus any employer contributions. The amount will be included as an “above-the-line” deduction on your tax return.

Part II: HSA Distributions

• Line 14a: Enter the total HSA distributions (withdrawals) during the tax year, found on Form 1099-SA.
• Line 15: Enter the amount of those withdrawals used for qualified medical expenses.
• Line 16: Report any non-qualified distributions, which may be subject to income tax and an additional 20% penalty.

3. Transfer to Your Form 1040

• Schedule 1, Line 13: Report the deduction amount from Form 8889, Line 13. This deduction decreases your taxable income.
• Form 1040, Line 2: If there were any taxable distributions from your HSA, it must be reported as income on your Form 1040.

4. Claim the Deduction

On schedule 1 of Form 1040, If you contributed to your HSA with after-tax dollars (not through payroll deductions), you can claim the HSA deduction.

5. Keep Records 

Keep all documentation in case of an audit. You may need to provide proof that your expenses were for qualified medical purposes. 

Final Take 

HSA accountholders have several tax advantages. If you contribute funds to your HSA directly, you can deduct that amount from your taxes. However, if you contribute money to your HSA through your paycheck, those funds are not deductible.

Share This Article: