These days, many employers offer health care, providing affordable plans and deductibles. Some employees may find that the plan they opted for has high deductibles. In order to help taxpayers plan for unforeseen medical emergencies and other medical costs, the government allows people to set up accounts solely for medical expenses called a health savings Account (HSA). Withdrawals from and contributions to this account are reported yearly with IRS Form 8889.
HSAs are triple tax free accounts. The contributions to them are tax deferred, it grows tax free, and withdrawals for medical expenses are tax free as well. There is no special permission required to open an HSA, either. Most financial institutions are able to offer this option to their customers. Each spouse is able to have their own HSA for themselves and dependents, but a separate Part II of IRS Form 8889 must be filled out for each one. Part II deals with distributions from the HSA to an account beneficiary.
IRS Form 8889 must be filed when a taxpayer or someone on their behalf (like an employer) makes contributions to the HSA. Also, if any distributions were received during the year, one must file. As long as a taxpayer is covered by a high deductible health plan (HDHP), they are able to continue owning an HSA. To be considered an HDHP, it must have a minimum deductible of $1,200 for single coverage or $2,400 for family coverage and maximum annual out-of-pocket expenses of $6,050 for single coverage and $12,100 for family coverage.
If an individual enrolls in Medicare or is claimed as a dependent on someone else’s return, they are considered to be ineligible to have an HSA. This also is true if they are no longer covered by an HDHP. In both of these cases, they must now report as income certain amounts of their HSA on IRS Form 8889, Part III. The last-month rule in Part III refers to the eligibility of the taxpayer. The period for eligibility begins on the first day of the last month of the tax year for that tax payer, which for most is Dec. 1. The testing period for eligibility begins there and ends on the last day of the last month of the following tax year or Dec. 31 for most taxpayers.
Qualified medical expenses can include unreimbursed medical expenses that can otherwise be deducted on Schedule A of IRS Form 1040. The HSA is not retroactive, so it can only cover expenses after it has been established and not prior expenses. For questions on IRS Form 8889, deductible medical expenses, and other tax issues, please consult with an experienced tax professional.