A Health Savings Account (HSA) is a tax-favored savings account used to pay for unreimbursed medical expenses for U.S. taxpayers.
How Does the HSA Work? Let’s look at an example…
In 2023, a U.S. taxpayer opens an HSA and contributes $2,000 to the account. The taxpayer will receive a tax deduction for the contributions.
The taxpayer’s total income on her Form 1040 individual tax return is $60,000. The taxpayer completes Form 8889 (Health Savings Account) to report the contributions, and she deducts $2,000 in contributions on her tax return. The taxpayer’s adjusted gross income (AGI) is now $58,000.
In 2024, the taxpayer used $500 of the $2,000 in her HSA account to pay for unreimbursed medical expenses. The taxpayer excludes the $500 from her taxable income because she used the funds to pay for eligible medical expenses.
Video Tutorials on HSA and Form 8889
Please visit our channel for video tutorials on HSA rules and how to complete Form 8889:
- How to complete Form 8889 for the 2023 Tax Year
- How to complete Form 8889 with Taxable Distributions
- TurboTax tutorial with Form 8889
Qualifications to Use an HSA
Only some U.S. taxpayers can use an HSA. The individual or family must meet the following requirements to open and fund an HSA and claim the tax deduction for contributions.
- The taxpayer is covered under a high-deductible health plan (HDHP) on the first day of the month.
- The taxpayer has no other health coverage except what is permitted under the regulations.
- The taxpayer is not enrolled in Medicare.
- The taxpayer cannot be claimed as a dependent on someone else’s income tax return.
What constitutes a high-deductible plan will change from year-to-year. In general, a HDHP is a plan which has:
- A higher annual deductible than typical health insurance plans; and
- Sets a maximum limit on the sum of the annual deductible and out-of-pocket costs.
Additional Information
Taxpayers seeking more information on HSAs can visit the IRS website and find more details in IRS Publication 969 (Health Savings Accounts and Other Tax-Favored Health Plans).