Health savings account (HSA)

An HSA is a savings account you can fund only while you are covered by a high-deductible health plan (HDHP). It gets three tax breaks that no other account combines.

• Contributions are deductible whether or not you itemize. Those taken from your paycheck also skip Social Security and Medicare tax (7.65%). Money you deposit yourself is deducted on your return but does not get that payroll tax break.
• Interest, dividends, and gains inside the account are not taxed. Most HSA providers let you invest the balance.
• Withdrawals for qualified medical expenses are tax-free at any age. Deductibles, copays, prescriptions, dental, vision, and Medicare premiums once you are 65 all count.

The balance carries over year to year, and the account stays yours if you change jobs or plans. Withdrawals for anything else are taxed as income, plus a 20% penalty if you are under 65. At 65 the penalty goes away, so for non-medical spending the account works like a traditional IRA.

The limit includes anything your employer puts in. Contributions for 2026 can be made until April 15, 2027.

Insurers usually label qualifying plans as HSA-eligible.

You can contribute for any month in which, on the first day of that month:

• You are covered by an HDHP.
• You have no other health coverage that pays before the deductible. A general-purpose health FSA counts as other coverage, including one your spouse has through work. A limited-purpose dental and vision FSA does not.
• You are not enrolled in Medicare.
• Nobody can claim you as a dependent.

If you qualify for only part of the year, the limit is prorated by month. If you qualify on December 1, you can contribute the full annual amount, as long as you stay eligible through December 31 of the next year.

$90,000 salary, single, self-only HDHP, contributing the full $4,400 through payroll. After the $16,100 standard deduction, taxable income drops from $73,900 to $69,500, which saves $968 of federal income tax at the 22% rate. The payroll contribution also avoids $337 of Social Security and Medicare tax. Total saved: about $1,305.

File Form 8889 with your Form 1040.

• Contributions (Part I): payroll and employer contributions appear in box 12 of your W-2 with code W. They were already left out of your taxable wages, so they are reported but not deducted again. Contributions you made directly flow to Schedule 1, line 13.
• Withdrawals (Part II): your HSA provider sends Form 1099-SA. You report the total and how much went to medical expenses. The rest is added to income, and the 20% penalty is figured here if you were under 65.

Keep a receipt for every expense you pay from the HSA or plan to reimburse later. Nothing is attached to the return, but the IRS can ask. An expense paid from the HSA cannot also be claimed as an itemized medical deduction.