If you’re reading this, you probably LOVE tax season and look forward to it every single year! Oh, wait, no. That’s probably not the case at all, is it? Understandable.
Tax season is confusing and daunting and probably the #1 thing about #adulting we all procrastinate on. And when you start throwing in layers like a health savings account (with investments to boot!), the confusion can pile up fast. But have no fear, because where you’ve got questions, we’ve got answers. Here’s what you need to know to have a seamless tax season.
Let’s Talk Tax Benefits
Don’t forget; your HSA is triple-tax advantaged. Which means:
- Contributions are pre-tax. Whether your contributions come from payroll or out of your pocket, you’re reducing your adjusted gross income. For payroll contributions, your W-2 will reflect those pre-tax dollars. If you contribute with your own post-tax dollars, you’ll see those savings reflected when you file your taxes.
- Growth is tax-free. Your HSA grows with interest tax-free, and if you take advantage of investing opportunities, any returns are tax-free as well.
- Spend tax-free. When you use your HSA on an eligible medical expense, it is tax-free. If you save receipts to be later reimbursed, you might see savings reflected in your tax return.
And while we’re reviewing basics, don’t forget these important dates and numbers:
- Contribution limits for the 2020 tax year were $3,550 for individuals and $7,100 for families. Depending on when you became HSA-eligible, you might be subject to prorated limits or qualify for the “Last Month Rule.” Additionally, once you reach 55, you can contribute an additional $1,000 to your HSA every year.
- The final deadline for contributions is April 15, 2021. If you already have an HSA with First Dollar, you can check your 2020 contributions directly in your dashboard.
What You Need to File Your Taxes
It wouldn’t be tax season if we didn’t require forms, right?. But fear not-they are easy to handle, and if you’re a member of First Dollar, we’ve made them incredibly accessible.
- Employer’s W-2: We’re all familiar with this one! Contributions from your employer are already excluded from your income on your W-2, so you can't claim these tax deductions on your other forms.
- 1099-SA form: This form shows you how much you spent out of your HSA during the tax year. This form will be mailed to you. If you’re an FD member, this form also lives in your tax center on your dashboard.
- 5498-SA form: This one shows you how much money was deposited into your HSA during the tax year (also found in FD member dashboards). If you contribute to your HSA in the new year leading up to the deadline, you should receive another 5498-SA form sometime in May.
- Form 8889: This is the form that you fill out and submit alongside your tax return. You can get this form from the IRS website, your tax advisor, or whatever software you might use to file your taxes. Simply use the above forms (1099-SA and 5498-SA) to fill out the necessary information and send it in!
Other than these, you should not need to report anything else regarding your HSA to the IRS. To be on the safe side, we always recommend that you track and document (you can upload your receipts to your dashboard if you’re an FD member) your HSA purchases in case of an IRS audit, which is unlikely to happen.
Corrections, Contributions, Extensions — oh my!
If doing your taxes starts to go awry, don’t fret! Here are some of the most common errors and how you can fix them.
- Corrections: This process could vary depending on your HSA provider, but at First Dollar, we make it super simple. Easily review all of your spending and other transactions directly in your dashboard and update their categorization as needed. For example, if something is labeled New Contribution, but is a rollover from an old HSA provider, you will want to update to Rollover from an Existing HSA to ensure you’re not penalized for over-contributing. Once the corrections are made, you will them reflected on your final forms at the beginning of April. If nothing needs to be corrected, you can proceed with filing your taxes anytime.
- Over-contributions: Hey, it happens. Sometimes we get overzealous with our savings and pass the limit. Here’s what to know: The overage qualifies as taxable income, and the IRS will charge a 6 percent tax on the over-contribution (note: the tax will apply every year the overage remains in the account). You can avoid penalization by making a correction withdrawal in your First Dollar dashboard (other HSA providers might handle this differently). Be sure to categorize this withdrawal as a correction within the appropriate year.
- Tax extension: If you procrastinate a little too hard or simply need more time, you might file for an individual income tax extension. This does NOT allow you to continue contributing for the 2020 tax year. You are still responsible for meeting the April 15, 2021 deadline for your HSA contributions.
That should clear up your immediate questions and concerns as tax season arrives. We promise the numbers and acronyms only look daunting; you’ve got this! And as always, we have a deep pool of experts waiting to guide you through it all.
If you’re looking for answers to more specific questions, please check out our tax FAQ’s or reach out to an expert.
