I often get questions about Health Savings Accounts (HSAs) and how taxes are applied to that money.
You should know that HSAs can be a highly effective tool for saving for healthcare costs while also saving on taxes. If you have questions about the rules and tax benefits of HSAs, then today’s post is for you.
What is an HSA, and do I pay taxes on the money in an HSA?
First of all, an HSA is a special savings account that you can use to pay for qualified medical expenses if you have a high-deductible health plan (HDHP). You can contribute directly to an HSA or through payroll deductions.
So how is this money taxed (or not taxed)? Here’s how this works:
- Your HSA contributions are tax deductible. For example, if you earn $60,000 for the year and contribute $3,000 to an HSA, you’ll only pay income taxes on $57,000.
- As long as you use your HSA funds for qualified medical expenses, then your withdrawals are tax-free. After you hit age 65, then you can use the funds for non-medical expenses without incurring a penalty, but the funds will be taxed as ordinary income at the tax rate for the tax bracket you’re in during retirement.
In addition, if you invest your HSA funds, any earnings or interest made on those funds is tax-free as well. Using this tax strategy for your HSA is such a smart move! To get all of the details on how it works, check out my Triple Tax-Advantaged Strategy for Your Health Savings Account post.
What are qualified medical expenses?
Sometimes clients are worried about “locking up” their money in an HSA, especially if they don’t typically have many medical expenses. One thing I like to point out to these clients is that the money never disappears. It’s not like many flexible spending accounts (FSAs) where you have to use the money by the end of the year or you lose it.
Your HSA funds are yours. They continue to roll over into the new year, and if you switch jobs or accounts, you can also typically roll your funds into your new account without any penalty. And, as I discussed earlier, you can use the funds for non-medical expenses after retirement (the money you withdrawal will just be taxed as income).
My clients also often worry about what will be considered a “qualified medical expense” and whether they have to keep extensive records and double-check some IRS list every time they want to use their funds. To that I say, yes, there is a list of qualified medical expenses maintained by the IRS, and yes, you should keep records of what you’ve spent; however, rest assured that this isn’t some sort of gotcha game.
In fact, the list of qualified medical expenses is pretty extensive and these expenses can also apply to your spouse, your kids, or any other dependent on your tax return. The list even includes some items you might not normally consider, such as:
- Breastfeeding supplies (nursing bra, pump, breastmilk storage)
- Chiropractor visits
- Condoms
- Contact lenses
- Corrective eye surgery
- Face masks
- Fertility treatments
- Hand sanitizer
- Menstrual products (pads, tampons, period underwear, cups)
- Orthodontics
- Over-the-counter (OTC) medicines
- Prescribed weight-loss programs
- Prescription glasses and sunglasses
How much can I contribute to my HSA?
The amount you can contribute to an HSA usually changes slightly each year, and the limit is different depending on if you’re contributing to an individual or family account and whether you’re 55 or older.
For instance, the HSA contribution limit numbers for tax year 2024 are:
- Individuals: $4,150
- Families: $8,300
- 55 or older: additional $1,000
The HSA contribution limit numbers for tax year 2025 are:
- Individuals: $4,300
- Families: $8,550
- 55 or older: additional $1,000
One thing to remember about these contribution limits is that the limit includes any contributions made by you, your employer, or anyone else on your behalf. Also, if you exceed the limit, you’ll have to pay a penalty and also pay taxes on any excess amount you contributed for the year.
If both spouses have an individual HSA, how much can they contribute in total?
In the tax world, this is kind of a fun question (don’t judge). If both you and your spouse have a separate high-deductible health plan (HDHP), you each can contribute up to the individual limit into your separate HSAs. So, for instance, instead of only being able to contribute $8,550 for your family’s HSA in 2025, you’d be able to contribute a total of $8,600. (Ok, so not wildly different, but it is kind of exciting to get a little bonus.)
And, if you and your spouse are both over 55, then you can each contribute an additional $1,000 into your separate HSAs. (You can’t both do this if you share a family HSA.)
What’s the deadline to contribute to an HSA?
So this is another fun question (I know you’re judging me now). Another tax-friendly aspect of HSA contributions is you have until the tax filing deadline (usually April 15th) to make contributions for the tax year.
For example, if you want to make an HSA contribution to count towards your 2024 taxes, you have until April 15, 2025 to get it done. This extra time can be a lifesaver if you’re looking for a way to lower your taxable income after the year ends. You’ll just want to make sure that when you make the contribution, you follow your HSA’s directions for indicating that your contribution is for the previous tax year.
I do have one other hot tip for you in terms of deadlines. If you don’t have enough money in your HSA to reimburse yourself for a qualified medical expense at the time you paid for it, you can save that receipt and reimburse yourself later as long as the expense occurred after the HSA was established. There is currently no time limit for reimbursing yourself with an HSA!
Abridged by Amy
HSAs are not just savings accounts; they are tools for managing your healthcare costs and reducing your tax burden. Whether you’re new to HSAs or just looking to maximize their benefits, knowing the rules can save you money and stress. For personalized advice or questions about your unique situation, don’t hesitate to reach out to a trusted tax professional for advice.
