HSA Tax Guide

Filing taxes with a Health Savings Account (HSA) doesn’t have to be confusing. This guide breaks down how HSAs affect your taxes, what forms you’ll need, how to report contributions and withdrawals, and how to avoid penalties or overpayments. It also includes the latest IRS updates for 2025 and 2026, plus what’s changing under new federal legislation. Whether you’re new to HSAs or just need a refresher, this guide will help you navigate HSA taxes with clarity and confidence. If you’re looking for a deeper dive into how Health Savings Accounts work- including how to open one, manage contributions, and understand account features, check out our comprehensive HSA guide.

Who is eligible for HSA tax benefits in 2025 and 2026?

Whether or not you can take advantage of HSA tax benefits depends on the type of health insurance plan you have. Under current IRS rules, you must be enrolled in a high-deductible health plan (HDHP) that meets specific federal requirements to open or contribute to a Health Savings Account (HSA). This matters because only people with qualifying plans can access HSA tax advantages—like deducting contributions, avoiding taxes on investment growth, and spending tax-free on qualified medical expenses.

Today, many Affordable Care Act (ACA) marketplace plans—including Bronze and Catastrophic tiers—don’t meet those eligibility requirements, even if their deductibles are high. That means millions of people are currently locked out of HSA tax benefits based on their plan type.

What's changing for HSA taxes in 2026?

Starting January 1, 2026, a new federal law—known as the One Big Beautiful Bill (OBBB)—will change the rules. OBBB expands the definition of what counts as an HSA-compatible plan. More marketplace plans will qualify, making it easier for more people to open and contribute to an HSA for the first time.

Tax impact: If you become newly eligible in 2026, you’ll be able to:

• Contribute to an HSA and deduct those contributions on your tax return

• Lower your taxable income each year you contribute

• Grow your HSA funds tax-free, including interest or investment earnings

• Withdraw money tax-free for qualified medical expenses

This change is especially valuable for:

• Freelancers and gig workers

• Early retirees who buy their own coverage

• Anyone using an ACA plan who hasn’t previously qualified for an HSA

You don’t need to take action yet—but if your current plan isn’t HSA-eligible, 2026 may be your opportunity to start using an HSA and get those tax benefits. Be sure to review plan options during open enrollment and check whether your plan qualifies under the new rules. If you want a deeper look at how the new law works and which ACA plans may qualify, check out our full OBBB guide.

How does an HSA affect your taxes?

A Health Savings Account (HSA) offers three key tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses aren’t taxed. That means you can lower your taxable income, grow savings over time, and spend on healthcare without owing taxes—if you stay within IRS rules.

These benefits apply whether you contribute through payroll (pre-tax) or on your own (and deduct the amount when you file). Either way, the result is the same: your taxable income goes down. Over time, interest and investment earnings grow in the background—untaxed—helping your balance build faster.

When you spend HSA funds on eligible medical expenses, you won’t owe taxes on that money, either. This includes everything from doctor visits to prescriptions to dental work. But if you use HSA dollars for non-medical expenses before age 65, you’ll pay income tax plus a 20% penalty. After age 65, non-medical withdrawals are still taxed but not penalized.

In short, an HSA is one of the only tools that lets you avoid taxes on the money going in, the money growing, and the money coming out—as long as you use it correctly.

How do you report HSA contributions and withdrawals on your taxes?

If you contributed to or withdrew from your HSA during the year, the IRS requires you to report that activity on your federal tax return. Contributions—whether made by you or your employer—and any withdrawals must be disclosed to confirm you followed HSA rules. You’ll use IRS Form 8889 to do this. This form calculates your tax deduction, tracks your distributions, and flags any excess contributions or non-qualified withdrawals.

If you only spent HSA funds on qualified medical expenses, you likely won’t owe taxes. But if you used the money for non-medical purposes or contributed more than the annual limit, you may owe additional taxes or penalties.

What tax forms do you need for your HSA?

HSAs come with unique tax advantages—but to keep those benefits, the IRS requires specific forms to track your contributions, withdrawals, and account activity. Some forms are sent to you by your employer or HSA provider, and others you’ll fill out when you file your taxes.

Here’s a breakdown of the key forms, what they do, and why they matter:

Form W-2 (Box 12, Code W)

• Where it comes from: Your employer

• Why it matters: If you contributed to your HSA through payroll deductions, your employer reports those pre-tax contributions in Box 12 of your W-2 using Code W. These amounts have already been excluded from your taxable income—so you don’t deduct them again when you file.

The W-2 form helps the IRS confirm that your contributions were made through your employer and stayed within the allowed limits.

Form 8889 (Health Savings Accounts)

• Where it comes from: You complete this yourself when filing your taxes

• Why it matters: This is the main HSA tax form. If you made contributions to your HSA (outside of payroll) or took any money out, you're required to file Form 8889 with your federal return (Form 1040).

On this form, you'll report:

• Total HSA contributions (yours + employer’s)

• All withdrawals (aka “distributions”)

• Any excess contributions or early withdrawals that may be penalized

Form 8889 determines whether you’re entitled to a tax deduction and whether any taxes or penalties apply. If you skip it or fill it out incorrectly, your return could be delayed—or flagged by the IRS.

Form 1099-SA (Distributions from an HSA)

• Where it comes from: Your HSA provider (typically sent by January 31)

• Why it matters: You’ll receive Form 1099-SA if you withdrew money from your HSA during the tax year.

It lists:

• Total amount distributed

• What type of account the money came from

• Whether the withdrawal was for qualified medical expenses (if reported)

You’ll use the numbers on the 1099 form to complete Form 8889. It helps the IRS verify whether your HSA withdrawals were used properly (and tax-free).

 Form 5498-SA (HSA Contributions)

• Where it comes from: Your HSA provider (typically sent by May 31)

• Why it matters: Form 5498-SA shows the total contributions made to your HSA for the year—whether by you or your employer. It also shows your account’s fair market value at year-end.

You don’t need to file the 5498-SA form with your return, but keep it for your records. It can be helpful if the IRS ever questions your contributions, or if you made late contributions for the prior tax year (up until the April deadline).

Form 5329 (Additional Taxes on Qualified Plans)

• Where it comes from: You complete this form only if it’s required

• Why it matters: You’ll use Form 5329 only if you owe a penalty.

When you'll use Form 5329:

• You exceeded the annual HSA contribution limit and didn’t fix it

• You made a non-qualified withdrawal before age 65

This form calculates the 6% tax on excess contributions and/or the 20% penalty on non-qualified withdrawals. It’s not part of most basic HSA filings, but it’s essential if you triggered one of these tax rules.

Each of these forms plays a role in proving to the IRS that you followed HSA rules and earned your tax benefits. Keep copies of anything sent to you, and make sure to complete what’s required when you file—especially Form 8889.

Need a checklist for all of these forms?

Save our Free HSA tax checklist so you're not caught unprepared during tax season.

How do HSA contribution limits affect your taxes?

HSA contributions directly affect your taxes by reducing your taxable income. When you put money into a Health Savings Account (HSA)—either on your own or through your employer—you can lower the amount of income the IRS taxes. These contributions are either excluded from your paycheck (if done through payroll) or deducted when you file your return. The more you contribute (up to the limit), the more you can potentially save on taxes.

But there’s a limit. The IRS sets a maximum amount you can contribute each year, based on your health plan and your age. If you go over this amount, you won’t get the tax benefit on the extra funds—and you could face a 6% penalty on the excess unless you fix it before the April filing deadline.

If you're age 55 or older, the IRS lets you contribute an extra $1,000 per year. This is called a catch-up contribution, and it’s designed to help older adults save more for future healthcare. Just like standard HSA contributions, this extra $1,000 is tax-deductible or pre-tax through payroll, and it's included on your tax return using Form 8889.

Important: To use the catch-up, you must have your own HSA. Spouses can't share this extra amount—they each need their own account to qualify.

Here’s how the tax savings actually work in practice: Jasmine is 35 years old, has self-only coverage, and earns $50,000 in 2025. She contributes $3,000 to her HSA during the year.

Because HSA contributions reduce taxable income, Jasmine only pays income tax on $47,000—not the full $50,000. That lowers her tax bill now, and the money she contributed can be used tax-free later for qualified medical expenses.

Even if you don’t max out your HSA, contributing what you can—before the April 15 deadline—can still help you save at tax time. Knowing your limit makes it easier to stay penalty-free and get the most from your account.

What special tax rules affect HSA contributions?

Most people follow standard IRS contribution limits, but a few special rules can change how much you’re allowed to contribute—and how your contributions are taxed. These rules can offer extra tax benefits, but they come with important conditions.

Catch-up contributions for age 55+

If you’re age 55 or older, the IRS allows you to contribute an extra $1,000 per year to your HSA. This is called a catch-up contribution, and it’s designed to help older adults set aside more for future healthcare.

This extra amount is treated just like a regular HSA contribution—it’s tax-deductible if made directly, or excluded from income if made through payroll. It’s also reported on Form 8889, along with your regular contributions.

An example of this would be: If you’re 57 with family coverage in 2026, your total contribution limit is: $8,750 + $1,000 = $9,750

Important: To qualify for the catch-up, each spouse must have their own HSA. You can’t combine the extra amount in a shared account.

The last-month rule and full-year contributions

If you're enrolled in an HSA-eligible health plan as of December 1, the IRS allows you to contribute the entire annual limit—even if you weren’t eligible earlier that year. This is called the last-month rule. That means you could open an HSA late in the year and still contribute as if you had the account all year—and deduct the full amount on your taxes.

But there’s a catch, you must stay HSA-eligible through the end of the following calendar year. If you lose eligibility during that time, the extra contribution becomes taxable and may be subject to a 10% penalty.

A real-world example might look like this: You enroll in an HSA-eligible plan on December 1, 2025, and contribute the full $4,300. If you switch plans or lose eligibility anytime before December 31, 2026, part of your contribution may be taxed and penalized.

These special rules can offer valuable tax advantages, but they also come with extra requirements. Whether you're contributing more because of your age or using the last-month rule to catch up late in the year, it's important to track your eligibility and timing closely. Following the IRS guidelines helps you get the most from your HSA—without triggering penalties at tax time.

What happens if you contribute too much to your HSA?

Contributing more than the IRS limit to your Health Savings Account (HSA) can create tax problems. Any amount over the limit is not tax-deductible and may trigger a 6% excise tax for each year the extra money stays in your account. This can affect how you file your taxes and whether you owe penalties.

Common ways excess contributions happen:

• You and your employer together go over the annual limit

• You switch to a non-HSA-eligible health plan during the year but keep contributing

• You miscalculate catch-up contributions or apply the last-month rule incorrectly

Excess contributions aren’t automatically flagged by the IRS—they show up when you report your HSA activity on Form 8889, so it’s important to catch and fix them early.

How can you fix an excess HSA contribution before tax time?

To avoid the 6% excise tax, the IRS gives you two main options—both of which should be completed before the tax filing deadline (typically April 15).

1. Withdraw the excess (recommended)

• Take out the extra funds before filing your taxes

• Include any earnings made on the excess

• This removes the taxable amount and avoids the penalty

2. Apply it to next year’s contribution

• You can leave the excess in your account and apply it to the next year’s limit

• But you’ll still owe the 6% penalty for the current year

For example, contribute $4,900 to your HSA in 2025, but the IRS limit for self-only coverage is $4,300. To avoid a penalty, you need to withdraw $600 plus any earnings before the April 2026 tax deadline.

Staying under the IRS limit protects the full tax benefit of your HSA. If you go over, early correction is key: it not only helps you avoid penalties, but also keeps your tax reporting accurate and your account in good standing. A little tracking throughout the year can save you from costly mistakes at filing time.

How are HSA withdrawals taxed?

Withdrawals from your HSA are tax-free when used for qualified medical expenses, such as doctor visits or prescriptions. This is one of the biggest tax advantages of using an HSA.

If you use your HSA for non-medical expenses, the tax treatment depends on your age:

• Under age 65: You’ll owe income tax plus a 20% penalty on the amount withdrawn

• Age 65 or older: You’ll owe income tax only, with no penalty—similar to a traditional IRA

You can also reimburse yourself for eligible expenses later, as long as:

• The medical expense occurred after you opened the HSA

• You have proof of the expense, like a receipt or bill

This flexibility allows you to decide when to take withdrawals and can help with year-to-year tax planning.

What medical expenses are considered tax-free?

Not all health costs qualify for tax-free HSA withdrawals. The IRS maintains a list of qualified medical expenses—these are the only costs you can pay for with HSA funds without triggering taxes or penalties. If you're unsure what counts, our HSA eligibility and expense guide offers a full breakdown of what’s covered.

Common examples include:

• Doctor visits and co-pays

• Prescription medications

• Dental cleanings and procedures

• Vision exams, glasses, and contacts

• Mental health therapy and counseling

• Over-the-counter medications (depending on the item)

• Physical therapy and chiropractic care

• Certain menstrual and reproductive health products

If you use HSA money for anything not on the IRS-approved list, you’ll owe income tax and possibly a penalty when you file.

Additional HSA tax considerations to know

Even with the core rules covered, there are a few less obvious—but equally important—tax-related issues HSA users should be aware of:

Make appropriate distributions

If you use HSA money for anything other than a qualified medical expense, and you're under age 65, that amount must be included in your taxable income—and you’ll owe a 20% penalty on top of that. After age 65, you’ll still owe income tax on non-medical withdrawals, but the penalty goes away.

Not sure what qualifies? The IRS says HSA funds should only be used to diagnose, treat, prevent, cure, or mitigate a disease or illness. For more details, refer to IRS Publication 502.

Watch out for itemized deductions

Since HSA contributions are already pre-tax, you can’t double dip by also itemizing those same medical expenses. Any expense paid with HSA money cannot be deducted again on your Schedule A. Always keep records to avoid claiming ineligible deductions by mistake.

Know your state tax rules

While HSAs are tax-advantaged at the federal level, a few states don’t conform to these rules. For example:

• Some states tax HSA contributions or earnings

• In Tennessee, HSA interest and dividends may count as taxable investment income

This means your HSA might be treated like a regular brokerage account at the state level. Check with a tax advisor or your state’s department of revenue to stay compliant.

Stay current with your taxes

If you fall behind on your federal tax payments, the IRS can levy your HSA to collect what you owe. If you’re under 65 and the funds are seized, it counts as a non-qualified withdrawal—and the full amount is subject to both income tax and the 20% penalty. Keeping your taxes current is another way to protect your HSA’s value.

Final HSA tax filing tips

Before you file your taxes, take a few minutes to review your HSA activity for the year. Double-check that your total contributions stayed within the annual limit, and make sure you have Form 8889 ready to report any contributions or withdrawals.

If you spent HSA funds, gather and save receipts for all qualified medical expenses. If you accidentally went over the contribution limit, correct the excess before the April deadline to avoid a penalty. And if your situation is more complex such as having multiple HSAs, employer contributions, or late-year eligibility changes, it may be worth talking to a tax advisor to ensure everything is filed correctly.

Interested in getting started or have questions about your HSA? Contact our team at Lively to learn more and see how we can support you.

Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.