A practical, in-depth look at HSAs and how they fit into tax planning.

With the expansion of the standard deduction, itemizing medical expenses has become more challenging for many taxpayers. However, by contributing to a Health Savings Account (HSA) and with careful planning, you may still be able to deduct your medical expenses.

Let’s review the requirements to open and contribute to an HSA account.

• First, the taxpayer must be covered by a high-deductible health plan (HDHP) and have no other medical insurance. The minimum annual deductible amounts for medical insurances to be considered HDHP in 2026 are $1,700 for individual coverage and $3,400 for family coverage.

• Additionally, the taxpayer must not be enrolled in Medicare. If a taxpayer already has an HSA account, then the day Medicare kicks in, the HSA funding needs to stop to avoid paying 6% tax on the excess contributions.

• Next, the HSA holder cannot be a dependent of another taxpayer.

Important things to know regarding HSAs

• Excess contributions are subject to 6%. However, if the excess contribution does not get removed on time to avoid the tax penalty, they can be rolled over to the next year’s contribution.

• For 2026 the contribution limits are: $4400 self-only and $8,750 family

• There is a catch-up Contribution of $1000 per taxpayer, when they reach 55 years of age.

• HSA contributions are allowed by the date of the return April 15, without extensions.

• Distributions made after 65 for non-medical expenses are taxable but not subject to penalty.

• Individuals who acquire an HDHP at the end of the year may elect to be treated as if they held the HDHP for the entire tax year. This allows making the entire contribution and catch-up contribution if over 55. However, the HDHP must be maintained for the next full 12 months to avoid a 10% tax penalty.

There are valuable planning opportunities when considering HSA accounts. For example, you can pay for qualifying medical expenses, medical insurance premiums like COBRA, Medicare premium, health care coverage while collecting state unemployment, and long-term care premiums (subject to the deductible limits based on the age of the taxpayer)

Consider stockpiling all the medical expenses and reimburse yourself later. You can use this strategy as long as the expenses are incurred after the HSA was established. Healthy clients with no earned income might look to the HSA account as a retirement tool. Remember, there is a 20% penalty when the money is used inappropriately or for non-qualifying expenses.

Feel free to schedule an appointment for additional consultation and planning.