The Health Savings Account Deduction

If you contribute to a health savings account (HSA) then you may qualify to use the contributions to lower your tax liabilities. HSAs are tax-deductible savings plans that allow taxpayers to save for future health expenses. Withdrawals from these accounts are usually tax-free, but only if the money is used for qualified medical expenses.

Above the Line

The HSA deduction is an above the line deduction, meaning that you can itemize even if you claim the standard deduction.

Deduction Limits

The deduction you can claim for your HSA contributions are limited to a maximum dollar amount. In 2010, the limit is $3,050 for individual coverage, $6,150 for family coverage, and $1,000 for catch-up contributions.

IRS Qualifications

According to IRS Publication 969, to be eligible for the HSA deduction you must meet the following requirements:

You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month.
You have no other health coverage except what is permitted under Other health coverage.
You are not enrolled in Medicare.
You cannot be claimed as a dependent on someone else's 2009 tax return.

A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.

No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

Claiming the Deduction

You will need to report your deductible HSA contributions on IRS Form 8889 and your Form 1040 when you prepare your return. You do not need to complete a Schedule A, just subtract them on the front page of your Form 1040 when you calculate your adjusted gross income.

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