Filing Taxes with a Health Savings Account (HSA): Part Two

In part one of this series about filing taxes with a Health Savings Account (HSA) we went over all the documents you need. This post will cover how to correctly identify your contributions.

Correctly Identify Your Contributions

HSAs can help you achieve tax savings in two different ways, depending on how you make contributions to your HSA. The two different contribution types are post-tax and pre-tax.

The difference between them is important to understand when filing your taxes.  Some tax savings you will realize through a paycheck deduction (pre-tax contributions) and some you will only realize when you file your annual return (post-tax contributions).

When you file your taxes, the IRS Form 8889 will determine the following things:

  • The first contributions you record on IRS Form 8889 are your post tax contributions.  This amount will later be deducted from your adjusted gross income, allowing you to pay less in taxes and a lower tax rate.
  • The second contributions you record is a sum of the money you put in your HSA on a pre-tax basis.  This amount will not affect your end of the year taxes because you will already have received the tax advantage from these contributions.  These contributions were not included in your taxable income on your payslips or your W2.  You did not pay income or payroll taxes on any of these amounts.

If you didn’t catch it already, the take-away from this distinction is that pre-tax contributions are superior to post-tax contributions.  Only with pre-tax contributions do you avoid payroll taxes.

Please see part three of this series that will give a more detailed explanation of the IRS Form 8889.

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