Type of Deduction:
You can deduct contributions to a health savings account as an Above-the-line tax deduction (you don't need to itemize).
Health Savings Account 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 at the federal level. Withdrawals from a health savings account are tax-free as long as the funds are used for qualified medical expenses. (See IRS Publication 502, Medical and Dental Expenses for what counts as qualified medical expenses.)
HSA Contribution Limits:
- For 2013: $3,250 maximum contribution for individual coverage; and $6,450 for family coverage. $1,000 for additional catch-up contributions for people age 55 or older.
- For 2012: $3,100 (individual), $6,250 (family), and $1,000 for catch-up contributions.
- For 2011: $3,050 (individual), $6,150 (family), and $1,000 for catch-up contributions.
- For 2010: $3,050 (individual), $6,150 (family), and $1,000 for catch-up contributions.
- For 2009: $3,000 (individual), $5,950 (family), and $1,000 for catch-up contributions.
- For 2008: $2,900 (individual), $5,800 (family), and $900 for catch-up contributions.
Tax Planning with Health Savings Accounts:
Health savings accounts achieve tax savings in two ways. Health savings accounts can accumulate funds and income without being subject to forfeiture as with flexible spending accounts. Funds inside an HSA can be withdrawn at any time for medical expenses. Thus the HSA can be used to accumulate tax-free income for use later in life. Secondly, HSAs can be used to pay for current medical expenses. For people with few medical expenses, HSAs have the effect of getting a deduction up-front, on page 1 of Form 1040, rather than as an itemized deduction which may have limited or no tax impact.
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. (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, Health Savings Accounts)
Health savings accounts are covered under Internal Revenue Code Section 223. Annual limits are established by Internal Revenue Service revenue procedures: Rev. Proc. 2012-26 for the year 2013 HSA Contribution Limits; Rev. Proc. 2011-32 for the year 2012 HSA Contribution Limits; Rev. Proc. 2010-22 for the year 2011 HSA Contribution Limits; and Rev. Proc. 2009-29 for the year 2010 limits.
- 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)