HSA Tax Savings

It is tax time again. During tax time, we get many questions. See below for frequently asked questions. If you have any further questions, please consult your tax professional.

How much am I saving in taxes because of my HSA? Can you just give me a ballpark savings estimate?
The answer depends on your marginal federal tax rate, your state income tax rate, how much you contribute and other factors. Individuals can claim a 2009 tax deduction of up to $3,000 for individuals ($3,050 for 2010) and $5,950 for families ($6,150 for 2010) plus a $1,000 catch-up if you are between ages 55 and 65 (same for 2009 and 2010). If you assume a 28% federal income tax rate, a 6% state income tax rate and a person making the maximum contributions, the savings would be $2,023 for a family High Deductible Health Plan (HDHP) ($5,950 x 34%) or $1,020 for a single HDHP ($3,000 x 34%). In addition to the tax deduction, funds in an HSA grow tax free. Note: a few states, like CA, do not allow a state income tax break for HSAs.

How do I actually get the tax benefit?
HSA contributions are tax deductible as an "above-the-line" deduction found on line 25 of the 2009 IRS Form 1040. "Above-the-line" means that you get the benefit of the deduction even if you take the standard deduction and do not itemize. Unlike other deductions, no income limits apply so even high income people can take advantage of the HSA deduction. You must file Form 8889 as an attachment to your 1040. If you use tax preparation software, the software will take care of this form for you. IMPORTANT: see the next question for employer contributions and HSA payroll deferral.

What if my employer actually put the money in the HSA?
If your HSA contribution was made pre-tax by your employer or through a Section 125 payroll deferral plan (you deferred some of your pay pre-tax through the employer), you cannot deduct the HSA contribution on your tax return. You cannot deduct it because it was never included in your income. This is good news because you already got the tax benefit and it was pre-FICA and FUTA too. Look at Box 12 of your Form W-2, if there is a number there with a Code W, you are in this position. You are still required to complete IRS Form 8889 and include it as an attachment to your 1040.

Can I still contribute to my HSA for 2009?
Yes, individuals have until April 15th, 2010 to make their 2009 HSA contributions. For example, John has a $5,000 deductible family HDHP that he started January 1, 2009 but never got around to making an HSA contribution. He now (February 2010) wants to contribute $5,950 for 2009 and can do that. He can also contribute another $6,150 for 2010 (assuming he is still eligible) for a total HSA contribution of $12,100 potentially all made on the same day.

How do I find out how much I contributed last year?
Your statements show contributions and you can add the contribution amounts together to find your total. If you made contributions through your employer, the amount is reflected in Box 12 of the W-2.

How do taxes on HSA distributions work?
Distributions for eligible medical expenses are tax free. The IRS however, still requires some reporting. A 1099-SA is generated that shows the amount of any distribution you took from your HSA in 2009. This is sent to you and the IRS. You need to reflect that distribution on the 1040 and complete Form 8889. Form 8889 is required for both HSA contributions and distributions. If the distribution is for eligible medical expenses, it will not be taxable income.

Can I use the Form 1040EZ if I have an HSA?
You cannot use the 1040EZ if a had a contribution to your HSA or a distribution from your HSA in 2009. You are eligible for the 1040EZ if you have an HSA but did not make a contribution or receive a distribution in 2009.