Note: When this blog article was originally posted, April 15, 2020 was the tax filing deadline for 2019 tax year. With the impacts being felt by COVID-19, the Internal Revenue Service (IRS) has extended the tax filing deadline until July 15, 2020.
Last year we mentioned that April 15, historically, isn’t the best day. Abraham Lincoln died on April 15, 1865, the Titanic sank on April 15 and, just last year, the Notre Dame in Paris was tragically damaged on April 15.
April 15 is also Tax Day in the United States – the day when individual income tax returns are due to be submitted to federal and state governments.
Filing taxes may not be the most exciting thing to do, but this year, just like last year, there is a silver lining: You can still contribute to your health savings account for 2019 before April 15, 2020 (or before you file your taxes, whichever comes first) and count the contribution as a last-minute tax deduction toward your 2019 income tax filing.
Why contribute now for 2019?
When you contribute to your HSA, you take smart steps to prepare for the future. Unexpected medical expenses may happen at any time, so having an HSA to help pay for qualified medical expenses can help lessen some of the financial burden. And any unused funds automatically carry over year after year, so you have the opportunity to save HSA funds all the way to retirement.1
Perhaps the greatest advantage of contributing now toward your 2019 income tax filing is that it lowers your taxable income,2 which, depending on your individual tax situation, can provide substantial savings. A financial advisor can help you determine just how much you can save.
important rules to keep in mind
When you contribute funds to your HSA for 2019 taxes, there are certain rules and regulations you need to follow. Not being compliant with these rules can end up costing you, so keep the following in mind:
- Stay within the timeline. Any contributions you make in 2020 to count toward your 2019 income tax filing must be made before you file your 2019 taxes or before April 15, 2020, whichever comes first. After those dates, any 2020 contributions you make to your HSA will count toward your 2020 income tax filing.
- Do not overcontribute. The maximum that can be contributed to your HSA (including by you, your employer and/or anyone else) for 2019 taxes is $3,500 if you are an individual or $7,000 if you have a family plan. If you’re over the age of 55, the IRS allows you to contribute an additional $1,000. Do not contribute more than these amounts or you could face significant tax penalties.
- What can you do if you have overcontributed? If you overcontribute to your HSA, you are subject to income taxes and a 6% federal excise tax. Individual states may also charge an excise tax. You may be able to avoid paying the excise tax if you withdraw any excess contributions before you file your 2019 taxes and include the withdrawn amount in “other income” on your tax return.
- What can you do if you lost qualifying healthcare coverage? In order to contribute to your HSA, you need a high deductible health plan. If you lose that coverage (job loss, divorce, etc.), you will have to stop contributing to your HSA, but you can still use any funds already in your HSA for qualified medical expenses. You can begin contributing when you receive HSA-qualified healthcare coverage again. IMPORTANT NOTE: If you contributed the entire maximum contribution limit at the beginning of the year and lose or change healthcare coverage, you will need to take some important steps (it might be a good idea to talk to a tax advisor) to ensure you follow IRS rules.
- You cannot count 2020 distributions from your HSA for 2019 taxes. If you spent any HSA funds in 2020, these expenses cannot be counted toward your 2019 income tax filing. In other words, any qualified medical expenses you want to use for taxes in 2019 had to be paid between January 1, 2019 and December 31, 2019.
- Do not “double dip.” If you make a contribution to your HSA in 2020 and count it toward your 2019 income tax filing, you cannot count this same contribution in your 2020 income tax filing.
Contributing funds toward your HSA for 2019 taxes still isn’t going to make April 15 the best day of the year, but it can help ease your tax burden, and that is a good thing.
So, don’t forget there’s still time to contribute funds to your HSA for a 2019 tax deduction. Contributing to your 2019 funds is easy (just give HealthEquity a call) and, as long as you follow the rules set by the IRS, the benefits can help bring short and long-term savings.
1. After age 65, if you withdraw funds for any purpose other than qualified medical expenses, you will be subject to income taxes. Funds withdrawn for qualified medical expenses will remain tax-free.
HealthEquity does not provide legal, tax, financial, or medical advice.
2. HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.