Filing federal income taxes is never easy. For people with Health Savings Accounts, or HSAs, additional reporting is required. However, the health insurance cost savings that can be achieved with a HSA is worth the added complexity. Contributions to HSAs are tax deductible. Withdrawals from HSAs are tax-free, but must be used to pay for eligible medical expenses. In order to get these benefits, transactions in HSAs need to be reported properly.
Verify that you are required to report any related HSA information for the current tax year. Only taxpayers who had any account activity during the tax year are required to report data regarding their HSAs. Activity includes all transactions that involve money going into or out of the HSA, but do not include any transactions that were purely internal. For example, all contributions or withdrawals are reportable, but changing investments to different options within the same HSA are not reportable.
Obtain Form 8889 from the IRS. All HSA transactions and other reportable events are reported on Form 8889. Form 8889 is filed with Form 1040. If married filing jointly, one form must be completed for each spouse. Do not intermingle information between the forms. Each HSA must be reported separately.
Gather all Form 1099-SA that you or your spouse received. Transactions made in HSAs are reported to the IRS by HSA trustees, and a Form 1099-SA containing the same information is sent to the account holder. These forms have data and amounts that will allow Form 8889 to be completed properly.
Complete Form 8889 Part 1. Part 1 is where all deductible contributions are reported. Fill in fields by using data reported on Form 1099-SA. If a deposit does not appear on Form 1099-SA, contact your financial institution immediately and have them issue an amended 1099-SA for the account. Discrepancies between this form and the reported amounts will be flagged for further inspection.
Complete Form 8889 Part 2. Part 2 of the form is for reporting all HSA distribution, including those that were not for qualified medical expenses, which are reported as Taxable HSA Distributions. For any transactions that are not reported on a Form 1099-SA, be sure to keep records of those expenses including payee, date of services, date of payment and amount paid.
Complete Part 3 of Form 8889 only if you did not maintain high-deductible health plan coverage throughout the tax year.