How an HSA Can Help You Reduce Taxes

A Health Savings Account, or HSA, is a tax-advantaged account that can be used to pay for qualified medical expenses. Unlike a regular savings account, an HSA can provide tax benefits when you contribute money and when you use the funds correctly.

The first tax benefit happens when money goes into the account. Eligible HSA contributions can reduce your taxable income for the year. If contributions are made through payroll, employer contributions and employee pre-tax payroll contributions are generally reported on your Form W-2 in Box 12 with Code W. If you contribute directly to an HSA outside of payroll, you may be able to claim the contribution on your tax return using Form 8889.

That means an HSA can lower the amount of income that is subject to federal tax, even though the money is still set aside for your medical expenses.

The second tax benefit happens when money comes out of the account. HSA funds can generally be used tax-free when they are spent on qualified medical expenses. In other words, when the rules are met, you may receive a tax benefit when you contribute and avoid tax when you use the money for eligible health costs.

However, an HSA is not available to everyone. To contribute, you generally need to be covered by an HSA-eligible high-deductible health plan. Not every plan with a high deductible qualifies, so it is important to confirm your plan is actually HSA-eligible before contributing.

If you are unsure whether an HSA fits your situation, it is a good idea to check with your health plan provider, a financial advisor, and a tax professional before making contributions.

Each month, I share a clear, bite-sized tax insight straight from my continuing education so you can stay informed without sifting through tax changes.

Next month, we discuss who can actually contribute to an HSA.

Thanks for reading,

Brandy Sparkman, EA

I’ll keep learning so you can stay focused on what you do best.

See you next month for another Tax Minute.