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Health savings accounts can be a great way for people with high-deductible health plans to pay for certain healthcare expenses and get a break on their federal income taxes. If you have an HSA, you’ll need to know about IRS Form 8889.
Contributions made to HSAs are generally tax deductible. If your account gains interest, the earnings are tax free. And distributions from the accounts can be tax free if you use the money to pay for qualified medical expenses.
But to reap those tax benefits, you need to let the IRS know how much went into your HSA for the tax year, along with how much you took out and what you used it for. That’s where IRS Form 8889 comes in.
To take a deduction for HSA contributions, you don’t have to itemize deductions on your federal income tax return — you can take a standard deduction if you choose. But you’ll need to complete and file Form 8889.
Let’s take a look at why you might need this tax form and how to fill it out.
- What is Form 8889?
- Why might I have to file Form 8889?
- What information is on Form 8889?
- What should I do with my Form 8889?
Form 8889 is used to report how your HSA will affect your taxes. Here’s what it covers.
- Your HSA eligibility
- Total contributions made to your HSA by you and/or your employer during the tax year
- Distributions from your HSA (or all your HSAs if you have more than one)
When you complete the form, you’ll know how much (if anything) you can deduct for HSA contributions. And it will help you understand whether you need to pay any taxes or penalties for HSA distributions that didn’t meet IRS rules for being tax exempt.
Here are some of the reasons you may need to complete and file a Form 8889.
- You or someone else made contributions to your HSA.
- You received distributions from an HSA.
- You stopped being eligible for an HSA during the year — for example, you stopped being covered by a high-deductible health plan.
- You inherited an HSA as an account beneficiary.
The Form 8889 has three parts.
Part I of Form 8889 …
- Confirms you’re covered by a high-deductible health plan
- Lists total HSA contributions that you or someone on your behalf made
- Addresses contributions you or your employer made to a specific type of medical savings account (if you had one)
- Allows for an additional contribution amount if you were 55 or older at the end of the tax year, are married, and you or your spouse had a high-deductible health plan at any point during the tax year
- Lists qualified distributions from your HSA
- Calculates your HSA deduction (if you’re eligible for one)
Your age and the type of HSA you have will determine your maximum tax-deductible contribution for the year. For 2019, this is $3,500 for self-only coverage and $7,000 for family HSAs. People who are 55 and older and not covered by Medicare may be able to add an additional $1,000 for the year.
But if you were only covered by a high-deductible plan, or HDHP, for part of the year, your maximum contribution will be prorated by month.
At the end of Part I, you’ll mark down your total HSA deduction. This will be either the total amount contributed to your HSA or the contribution limit for the year, whichever is less. If your contributions were more than the maximum, you may need to pay taxes on the excess contributions.
On the second part of Form 8889, you report distributions from HSAs.
You’ll start by tallying up your total distributions for the year from all your HSAs (it’s possible to have more than one). Then you’ll add up all the qualified medical expenses that you paid for with HSA distributions.
It’s important to know that only certain expenses qualify for payment or reimbursement with HSA funds. Generally, medical expenses will only qualify if …
- You incur the expenses after you’ve established the HSA, not before.
- You haven’t been reimbursed for them.
- You could claim them as a deduction on Schedule A (which you would use if you itemized your deductions).
- They’re for drugs you’ve gotten with a prescription, not over-the-counter drugs (unless prescribed). Insulin may qualify even without a prescription.
If you have any distributions for non-qualified expenses, you’ll need to pay a 20% tax on them. You’ll total this up at the end of Part II.
What is the medical expense deduction?
If you itemize deductions on your federal income tax return, have eligible medical expenses that weren’t covered by insurance and those costs add up to more than 7.5% of your adjusted gross income, or AGI, for the year, you may be able to take a medical expense deduction.
But not every health-related cost will be eligible for the deduction. For example, if you had to pay for contact lenses and that cost wasn’t covered by any insurance, that expense could be eligible. But your gym membership wouldn’t be.
You’ll use Part III if you changed or ended your coverage during the year, altering your eligibility for an HSA and potentially subjecting you to more taxes.
Under IRS rules, if you’re eligible to have an HSA on the first day of the last month of the tax year (Dec. 1 for most people), you can contribute the yearly maximum to your HSA. That means if you became eligible to have an HSA on Dec. 1, 2019, you could put up to $3,500 in your HSA that month for self-only coverage or up to $7,000 for family coverage. And if you were 55 or older, you could contribute an additional $1,000.
But, if you lose your eligibility for an HSA before the end of the following calendar year, you lose the benefit from that “last month” rule.
In Part III, you’ll disclose any additional contribution you made the previous year under this provision and calculate a 10% tax on it.
If you ended your eligibility, you’ll generally also need to disclose any direct transfers from a retirement account (like an IRA) to your HSA and calculate a 10% tax.
Before you start filling out Form 8889, make sure you have all of the information you need.
Once the tax year ends, you should start receiving forms from your HSA administrator. Form 5498-SA will detail contributions you made, and your W-2 will have any employer HSA contributions. Form 1099-SA should detail all distributions. All this information will go on your Form 8889.
Once you’re done with Form 8889, you’ll attach it to your Form 1040 — the form everyone uses to file their taxes. You’ll include your HSA deduction on Form 1040 Schedule 1, a common form used to adjust income.Learn how to read a W-2
If you’re in a high-deductible health care plan, it makes sense to put money into an HSA. Be sure you understand the rules for HSAs, including whether you’re eligible to have one — not everyone is.
But when it comes time to file your taxes, it’s important to have all of your forms in order to maximize the tax benefits of your HSA and avoid penalties.
Troy Grimes is a tax product specialist with Credit Karma Tax®. He’s worked in tax, accounting and educational software development for nearly 30 years. He has a bachelor’s degree in business administration with an emphasis in business analysis from Texas A&M University. You can find him on LinkedIn.