If you have a Health Savings Account (HSA), you might be a bit confused come tax season. You’re probably already aware that a tax-sheltered HSA offers incredible financial benefits, but figuring out how to get the most out of your tax savings can become a little fuzzy. To ensure your contributions are tax exempt, you must file Form 8889. Doing so also prevents you from paying penalties and enables you to claim certain deductions. Not sure how? Keep reading to learn all about the HSA Form 8889 instructions and see how you can make the most out of this tax year.
What is Form 8889?
Put simply, the IRS uses Form 8889 for HSA reporting. If you hold an HSA account (or are the beneficiary of a deceased HSA holder), you’re required to attach Form 8889 to your Form 1040 when filing your personal income tax or information return. If you fail to do so, you’ll be unable to deduct your HSA contributions.
Form 8889 serves several purposes for the IRS. They require you use this document to:
- Report Health Savings Account contributions (including those made on your behalf and employer contributions)
- Determine your HSA deduction
- Report distributions from your HSA
- Figure out amounts you must include within your income report; if you are no longer HSA eligible, you may be required to pay additional taxes
Who is HSA Eligible?
In order to qualify for an HSA, you must first meet the following requirements:
- You are covered under a high deductible insurance plan (HDHP)—a health insurance plan with lower premiums, but higher deductibles
- You have no other health care coverage (with the exception of a few forms, such as disability, worker’s compensation, specific diseases or illnesses)
- You are not enrolled in Medicare
- You cannot be claimed as a dependent on someone else’s tax return
Under the IRS “Last Month Rule,” you may be eligible for an entire year if you’re considered an eligible individual on the first day of the last month of the tax year (December 1 for most taxpayers). If you fail to remain eligible for an HSA—for reasons other than disability—you will be required to include in income the total contributions made to your account. This additional amount of income is subject to a 10% added tax which can be calculated on Part III of HSA Form 8889.
If you don’t qualify for an HSA, but would like to save money on your medical coverage through taxes, see if you are eligible for the Healthcare Marketplace Tax Credit Form.
Why get an HSA?
If you’re curious about why filing and following 8889 instructions is worth your while, consider the multiple benefits of an HSA, a savings account designated for medical expenses:
- Based on your employer’s plan, contributions to your HSA account can be taken directly from your paycheck prior to being taxed
- Your employer may also make contributions to your HSA on your behalf
- After filing Form 8889, you can deduct the amount you contribute to your HSA on your personal income tax return
- Money in your HSA account can earn interest every year, tax-free
Once you reach age 65, your HSA resembles a retirement plan in that you can withdraw money from your account for non-medical expenses (if you take money out of your HSA account prior to this time for anything other than qualified medical expenses, you may be hit with a 20% tax penalty).
Form 8889 Instructions
If you’ve decided an HSA is in your best interest and have opened an account, you’ll need to file an HSA 8889 in order to reap all of its benefits. Before you file Form 8889, be sure to gather all of your necessary documents in advance and to follow the 8889 instructions carefully. Some paperwork you might need includes:
- IRS Form 5498—contribution activity, provided by the HSA custodian
- IRS Form 1099—distribution activity, provided by the HSA custodian
- IRS Form 8853—reports contributions and payments from Archer MSAs and payments from long-term care insurance contracts, if applicable
- W-2 Form—displays the amount of contributions made by your employer, if applicable
Once you’ve gathered your necessary paperwork, carefully follow the Form 8889 instructions line by line; failing to do so could result in an error, which might then require tax resolution.
Form 8889 Instructions—Part I
This portion of HSA Form 8889 covers contributions and deductions. Find the amount reported on Form 5498-SA and enter it in line 2; if your employer made contributions to your HSA, enter the amount reported on your W-2 on line 9. Be sure to make note of the contribution limits on line 3; once you hit age 55, this number will change and should be accurately reflected on your Form 8889. Line 13 is also important—it’s the amount of money you can deduct from your income per HSA tax law. This number will eventually make its way to Form 1040.
Form 8889 Instructions—Part II
This section of tax Form 8889 assesses your distributions and verifies whether it was spent properly. Line 15 determines how much was spent on qualified medical expenses; any amount greater than box 14c will be penalized. If the subtraction on line 16 is a positive number, you will owe tax and penalty on the amount (20%).
Form 8889 Instructions—Part III
Part III of HSA 8889 assesses whether you owe taxes and penalties for two possible reasons:
- You utilized The Last Month Rule, and later ended your HSA insurance plan early, thereby violating the Test Period
- You funded an HSA distribution from an IRA or Roth IRA
In most cases, these numbers will be zero. If you do have numbers on lines 18 and 19, combine their total on line 20 (and remember to include it on line 21 “Other Income” on Form 1040.
Community Tax Filing Services
An HSA account is a great way to save money by paying for medical expenses with tax-free dollars. However, you can’t take full advantage of the many benefits an HSA offers without filing Form 8889 first. If the multi-step 8889 instructions seem daunting, enlist the help of the professionals at Community Tax. We offer full tax filing services so you can sit back and relax, knowing your taxes are in good hands.