It was a year like no other year. And yet, tax season is upon us again. The good news? The dollars you didn’t spend on great adventures in 2020 can earn you great savings on your 2020 tax bill.1 Add a little or add lot to your HSA, right up to the IRS allowable maximum.
It’s a smart, practical way to save on taxes today while also setting aside funds for future medical expenses.
What's the deadline?
Even though you might currently be making 2021 tax year HSA contributions through payroll deductions, there’s still time to max out your 2020 tax year HSA contributions. In fact, you can make 2020 tax year HSA contributions right up to the time you file your 2020 taxes (the tax filing deadline is April 15th).
how much will you save?
Every dollar you add to your HSA reduces your taxable income by one dollar. So, if your effective tax rate is 25 percent, you’ll save a quarter for every dollar you set aside.2 Those quarters can add up fast! Plus, the dollars your save in your HSA will be there if you need them for qualified medical expenses (or long-term retirement savings3).
how much can you contribute?
For the 2020 tax year, the IRS HSA contribution limits are:
- $3,550 for individual health plans
- $7,100 for family health plans
If you’re 55 or older, you’re allowed to contribute an additional $1,000 catch-up contribution under either plan type beyond standard IRS limits.
There are just a few things to keep in mind:
- Be sure your 2020 health plan counts as an HSA-qualified health plan under IRS rules. Otherwise contributions could be subject to a tax penalty.
- Don’t over-contribute. Contributions beyond IRS limits could also incur tax penalties.
what's the catch?
No catch. Money you put in your HSA is your money to keep—even if you change employers or health plans. There’s no “use it or lose it” like with a Flexible Spending Account.
HSA funds are there for you to spend as you need and save if you don’t—and any dollars you don’t spend carry over year after year. Medical expenses will only increase as we get older, so setting funds aside now makes sense.
how do i make a tax-deductible contribution?
You can log into your HealthEquity account and initiate an EFT transfer with your linked bank account. If you haven’t linked a bank account yet, you’ll have to do that first. Then, just select the amount you’d like to contribute and the money will automatically be drawn from your checking account into your HSA.
how do i report it on my taxes?
Just a few steps:
- HealthEquity will report your total 2020 contributions on IRS Form 5498-SA, which will be sent to you.
- Then, you can report your tax-deductible HSA contributions on Form 8889 (these are the contributions you’ve made with after-tax money via bank transfer—not through payroll deductions).
- From there just list your total contributions on Form 1040 (this will include your after-tax contributions plus the HSA contributions taken out of your paycheck in 2020).
and what should i do with my tax savings?
That’s up to you. But for many of us, it’s a chance to set aside some funds to make up for the 2020 vacations we missed. Of course, it’s also extra cash you can contribute to your HSA for tax year 2021.
So, don’t wait. Log into your HealthEquity account and make a tax-deductible contribution right now.
1HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-deductible with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.
2The example(s) used is (are) for illustrative purposes only.
3After 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 or financial advice. Always consult a professional when making life-changing decisions.