Can you deduct expenses on your tax return if they are paid with an HSA?
No. You fund the HSA with pretax money and it grows tax free, so those are the tax benefits from it. You don’t get a deduction for things you never paid tax on in the first place. Funds you withdraw from your HSA are tax-free when used to pay for qualified medical expenses. These medical expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. A very useful taxpayer guide and a list of these expenses is available in IRS Publication 502, “Medical and Dental Expenses.”
When to use HSA account?
It’s still a good idea to use an HSA (or flex spending account) instead of relying on medical expenses as itemized deductions. For most of us, you could only deduct medical expenses in excess of 10% of your adjusted gross income and assumes you itemize your deductions. The HSA allows you to shield income from tax, assuming it’s used for medical purposes. However, remember that any funds you withdraw for non-qualified medical expenses will be taxed at your income tax rate plus 20% tax penalty if you’re under 65.
HSA Annual Contribution Limits
Annual contribution limits are $3,250 for singles/$6,450 for families for 2013 and $3,300 for singles/$6,550 for families for 2014. Individuals aged 55+ may contribute an additional $1,000 for each tax year.
Using an HSA in Retirement Planning
HSA can be a very useful retirement planning tool in addition to an IRA and other types of tax advantaged retirement accounts. However, remember that you cannot deduct medical expenses with the medical expense deduction on your tax return if the medical expenses was paid through an HSA. The IRS will most likely find this error on audit if it asks to substantiate the medical expenses deduction and also have substantiation from the HSA provider on the types of payments that they made for qualified medical expenses. As always, keeping excellent records of these expenses is the best way to avoid any issues after filing your tax return with the IRS.