In previous posts of this series we covered the documents associated with filing taxes with a Health Savings Account(HSA), the difference between pre-tax and post-tax contributions and common questions about part 1 of the IRS Form 8889.
This post will continue where we left off by answering common questions people have about Part 2 of the IRS Form 8889.
Part two of Form 8889 determines if any taxes and penalties apply to amounts spent or distributed from your HSA. The penalties calculated in this part will only apply to non-eligible spending from your HSA. Note that you are excluded from these penalties the year you turn 65 but not from paying income tax when using HSA money on non-qualified expenses. (Ahh, the benefits of aging.)
Do I enter amounts in my Tango Flex Reserve™ on my taxes?
If you are a Tango accountholder, any amount currently in your Flex Reserve is only for your record keeping. The Flex Reserve is the amount of money you can reimburse yourself tax-free based on medical spending paid by a source other than your HSA. This amount is not reported on your tax return at all since you only report actual dollars that have already been spent or distributed out of your HSA. Flex Reserve is a future tax-free reimbursement opportunity, so you do not need to report it.
What is line 15 asking for? What does it mean by ‘unreimbursed qualified medical expenses?’
The IRS is trying to determine how much of the money distributed from your HSA was to reimburse you for qualifying medical expenses. In line 14c you should have entered the amount of money that was taken out of your HSA and not rolled over. On line 15, you should enter the total HSA money you spent legally on qualified medical expenses. The IRS calls this amount unreimbursed qualified medical expenses because you should not be reimbursed by your insurance for expenses you paid for with HSA money. If you used your HSA as it is meant to be used, line 16 should be zero. If you distributed money for reasons other than qualified expenses (such as to buy birthday balloons) or you were reimbursed through insurance for expenses you paid for with HSA money, then you owe tax and a penalty (if you are under 65) on the amount.
This section is especially helpful for people that are 65 or older. These people can start taking money out of an HSA for non-medical expenses and this calculates how much should be taxed.
Example (follow along by referring to the image above): Eli took money out of his HSA three times in 2011. The first time, he spent $215 on prescription glasses with his HSA debit card. The second time he spent $12 dollars on over-the-counter cold medicine using a check. Then in October he opened a new HSA at a different custodian. He took all $658 left in his old HSA and rolled it over to his new HSA.
When he is filling out line 14a he puts $885, the sum of the money that came out of his HSA. On line 14b he puts $658, the amount he rolled over. On line 14c he puts $227, the amount he paid for expenses. On line 15 he puts $215, the amount of HSA money used for eligible expenses. After subtracting line 15 from line 14c, Eli records $12 on line 16. This is his ‘taxable HSA distributions’ because he spent HSA money on non-qualified expenses. Finally on line 17b, Eli writes in $2.40, the penalty for using an HSA on non-qualified expenses because he is not older than 65.
Note: Eli also spent $400 dollars using his American Express card on qualified expenses and those were automatically recorded in his Flex Reserve because he uses Tango. The amount is not reported anywhere on his taxes though because the money did not come out of his HSA yet.
I don’t know if the expenses I had were eligible. How do I check if my expenses were eligible?
You should check publication 502 in order to make sure all the disbursements from your HSA were for eligible expenses. If you have questions about expenses feel free to contact Tango Health or your tax advisor. While we can’t give you tax advice, we can help you find the category of expenses it may fall under.
Note: Keep your IRS Form 1099-sa when you receive it as evidence of correctly completing your tax return. If you are audited you may have to produce this form. Also, if the IRS has questions regarding spending or disbursements from your HSA, this form will likely be required and will definitely be helpful.
Next, please see the last part of this series where we'll cover the final section of IRS Form 8889 by going over common questions about Part 3 and more general questions.