It's Tax-Preparation Time. What Every Owner Needs to Do Now.
by William G. Stuart | Originally posted on LinkedIn - Health Savings Academy
Yes, Health Savings Accounts are triple-tax-free. But you must complete some paperwork to receive the full benefit. Relax - the work isn't taxing.
It's said that the only two certainties in life are death and taxes. (Yes, former NBA guard Otis Birdsong revised the list to include a third entry - 'my jump shot' - but that's generally not recognized as a third certainty.)
The statement isn't literally true, as any educated Health Savings Account owner knows. Funds flowing into and out of this tax-perfect account are never taxed when the distributions are for qualified expenses. But to receive the full tax benefit, owners must limit their withdrawals to qualified products and services and file the appropriate paperwork to receive the full tax benefit.
And that paperwork is part of a personal income tax return, which many taxpayers are - or soon will be - working diligently to complete by the spring deadline.
Here's what you need to know to gain the full tax benefits of your Health Savings Account for 2023.
Summing Contributions
Your Health Savings Account trustee is responsible for issuing Form 5498-SA, which reflects all contributions during the 2023 calendar year (contributions are always tracked on the calendar year, regardless of when your medical plan renews) and the fair market value of the account. Trustees have until May 31 to issue this form because account owners can contribute up to the standard tax-filing deadline (around April 15). Thus, you won't have a final Form 5498-SA to help you prepare your tax return.
So, how do you determine how much you contributed in 2023?
Many trustees post a preliminary Form 5498-SA shortly after the end of the plan year on your online account. If you make no contributions after Dec. 31, that document should accurately reflect all deposits.
Form W-2, issued by your employer no later than Jan. 31, summarizes payroll activity (total cash compensation, the value of certain other compensation, and itemized payroll deductions). Box 12 has an entry for the sum of all contributions through the company's Cafeteria Plan - both your employer contribution and your pre-tax payroll deductions. If you contribute only through payroll deductions, this figure will accurately reflect your total contributions.
Your trustee. You can tabulate contributions by reviewing each line of account activity through your online account. Or you can call and speak to a customer service representative, who should be able to do the calculation for you.
All contributions through your company's Cafeteria Plan are pre-tax at the time you receive each paycheck. Therefore, you can't deduct them from income on your personal tax return. But deposits with personal funds are post-tax and must be deducted on your tax return to reduce your taxable income.
Summing and Qualifying Distributions
You should have received a copy of Form 1099-SA (instructions here) if you withdrew funds from your account in 2023. This form, prepared by your trustee, must be mailed by Jan. 31. It's also typically posted on your online account.
Form 1099-SA reflects total distributions from your account during the calendar year. It doesn't break down those expenses as qualified and non-qualified. The law places the burden of knowing whether each expense is qualified on you, not your Health Savings Account trustee. (Note: In contrast, a Health FSA administrator is responsible for substantiating all expenses because spending is limited to qualified expenses.) You must maintain records to determine the subtotals of qualified and non-qualified withdrawals.