New year, new tax returns. And as we've said goodbye to what was a most memorable year and in the first few months of 2021, we might be gearing up to gather our tax documents and file a return. If you have an HSA, to help you best prepare to file your income taxes, here are some questions on your HSA and filing 2020 income taxes, answered:
How do my HSA contributions affect my income taxes?
One of the major tax perks of having an HSA is that your contributions lower your adjusted gross income (AGI), which is what determines your taxable income. So when you add money into your HSA, it'll bump down the amount you owe Uncle Sam.
What are the other tax perks of an HSA?
Other tax benefits an HSA include:
- Interest or other earnings on your contributions are tax free.
- Any money you take out and use on eligible medical expenses might also be tax-free.
- Your HSA is linked to you, the individual and not with your employer. So if you job-hop and are no longer with your employer, that HSA stays with you.
- That money is rolled over from year to year. You don't have to spend that money by the end of the year or within a certain time frame.
To see how much you can save on your taxes by making contributions to your HSA, check out our handy HSA Tax Savings Calculator. Punch in a few numbers to see what tax savings you might be able to enjoy.
Do I need to pay income or payroll taxes on my HSA contributions?
So how does the deductibility of HSA contributions work, exactly? Let's break this down by starting with income taxes. Contributions made to an HSA are not subject to federal income taxes. And in many states, you also don't have to pay state income taxes.
But HSA contributions, however, are still subject to payroll taxes. If you have an HSA offered by your employer, there's a good chance your employer is making those contributions through what's called a Section 125 salary reduction arrangement (aka cafeteria plan). In a nutshell, money an employer puts into an HSA is made before tax liability gets calculated. In turn, the benefit is you'll owe less in income and payroll taxes on your salary.
Any contributions your employer makes on your HSA isn't considered income, and therefore won't need to pay income tax or payroll tax. And if you're making contributions to your HSA through a Section 125 salary reduction arrangement, these are actually considered employer contributions. As a result, you also benefit as you won't need to pay any income or payroll taxes, either.
If you have a high-deductible health plan (HDHP) and HSA on your own, or if you have an HSA that's a different one than your HSA administrator, the good news is you still won't need to pay income tax. However, you're on the hook for paying payroll taxes (i.e., Social Security and Medicare taxes), and most likely unemployment insurance tax.
What tax forms do I need to fill out?
Are you ready to get super tax technical? Here it goes: Filing out tax forms for your HSA contributions. In any given tax year when you take money out of your HSA or you or your employer makes contributions to your HSA, you'll be required to file a Form 8889 to report tax info details. The Form 8889 is to do the following:
- Report HSA contributions
- Report withdrawals from your HSA
- Determine your HSA deduction
- In the case that you're not eligible to make contributions in that tax year or pulled money out to use on a non-qualified expense, it'll determine how much you owe in income and additional tax.
(Note: If you aren't careful and put money into your HSA when you weren't eligible to, you might get dinged with penalties.)
If you have an HSA that's independent of your employer or purchased an HDHP on your own, you're making contributions with after-tax money. The sweet perk is that you get to deduct your contributions on your tax return, regardless of whether you take the standardized or itemized deduction. It's on line 25 of Form 1040.
What forms do I need to have on-hand?
Other tax forms related to HSA? If you made contributions during 2020, your HSA administrator will send you Form 5498-SA. If you had any distributions or took money out of your account, then you should receive a form Form 1099-SA.
Can I deposit my tax refund into my HSA?
Indeed you can. You'll need to provide the routing and account numbers of your HSA. Want to deposit all of your tax refund into your HSA account? If so, you can add your info to the direct deposit line on your 1040 tax form.
You have the option of divvying up your tax refund so it gets direct deposited into up to three different accounts. So if you want to deposit part of your tax refund into your HSA and the rest into other savings accounts, you can certainly do so. You can opt for this when using tax filing software.
Not only does it make it easy for you to make additional contributions to your HSA, but refunds that get direct deposit typically are received quicker than if you opted for a check in the mail. Remember: the IRS has set the contribution limits for 2021 are $3,600 for individuals, and $7,200 for families. If you're keen on contributing the max, giving a boost to your HSA fund earlier in the year means you won't have to be as aggressive in your contributions down the line.
Getting your head around HSA-related matters and filing 2020 income taxes will help you understand how your HSA impacts your tax returns. You'll be able to best prepare for tax season, make the most of your refund, and strategize financially for 2021.
Jackie Lam is a personal finance writer and is based in Los Angeles. Her work has appeared in Business Insider, Salon, Mental Floss, and GOOD. She is a candidate for the ACFPE® financial coaching certification.
Jackie is passionate about helping artists, freelancers, and gig economy workers with their finances. She has in-depth experience writing about budgeting, investing, frugality, money, and relationships, and loves finding interesting stories that revolve around money.