Health Savings Account Deduction

Type of Deduction: Above-the-line tax deduction (you don't need to itemize).

Basics: Health savings accounts (HSA) are tax-deductible savings plans that allow a taxpayer to save pre-tax dollars for future healthcare expenses. HSA are paired with high-deductible health insurance plans. Contributions to an HSA are tax-deductible. Earnings, such as interest and dividends, in the health savings account are tax-exempt. Withdrawals from a health savings account are tax-free if the funds are used for qualified medical expenses.

Limits: Tax deductions for HSA contributions are limited to $2,650 for individual insurance coverage and $5,250 for family insurance coverage for tax year 2005. If you are age 55 or older and not enrolled in Medicare, you can make additional catch-up contributions of $600. No HSA contributions or tax deduction are permitted if you are enrolled in Medicare Part A or Part B.

Planning Ahead: For tax year 2006, HSA contributions are limited to $2,700 for individual coverage, $5,450 for family coverage, and $700 for additional catch-up contributions for people age 55 or older.

Qualifications: You must be enrolled in a high-deductible health insurance plan and not covered by another type of health insurance plan (such as an HMO or PPO type plan). The high-deductible plan must meet certain rules.

Where to Claim Deduction: Report your tax-deductible HSA contributions on IRS Form 8889, with the total contributions also reported on Form 1040 Line 25. (Links: Form 8889 and Instructions). Insurance companies report your HSA contributions to the IRS using Form 5498-SA.

From the IRS: "A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA." (from IRS Publication 969)

Tax Law: Health savings accounts are covered under Internal Revenue Code Section 223. Annual limits are established by Internal Revenue Service revenue procedures. The annual limits for 2006 are set in Revenue Procedure 2005-70.

More Information:
• IRS Form 8889 (PDF, 1 page)
• Instructions for Form 8889 (from the IRS)
• Health Savings Accounts and Other Tax-Favored Health Plans (Publication 969)
• JK Lasser's Your Income Tax (Chapter 12.9-12.11 on Health Savings Accounts)
• Internal Revenue Code Section 223 (Legal Information Institute, Cornell Law School)
• Revenue Procedure 2005-70 (for 2006 annual limits)

Basic Information about Health Savings Accounts:
• The ABCs of HSAs (from health insurance guide Kelly Montgomery)
• The HSA Option for Small Business Health Care (from JoAnn Laing, author of "The Small Business Guide to HSAs")