Need to Know Tax › Retirement and seniors
Health savings accounts
HSAs: the deduction people miss
For anyone with a high-deductible health plan, and for anyone who put money into an HSA on their own last year and never saw it on the return. The only account that is tax-free going in, growing, and coming out, and the one deduction self-prepared returns miss most.
A health savings account is the only account that is tax-free going in, tax-free while it grows, and tax-free coming out for medical expenses. A traditional IRA gets the first two. A Roth gets the last two. An HSA gets all three, which is why people who understand it treat it as a retirement account that happens to pay for prescriptions. And of all the errors on self-prepared returns, missing the HSA deduction is the one preparers find most often, including on returns prepared by someone else.
| Self-only coverage | $4,400 |
| Family coverage | $8,750 |
| Catch-up at 55 or older (each spouse, in their own account) | $1,000 |
| Deadline for a 2026 contribution | April 15, 2027 |
The limits include what your employer puts in. Starting in 2026, bronze and catastrophic plans bought through the Marketplace also count as HSA-eligible coverage, which opens HSAs to many more self-employed people.
What it is
To contribute, you need to be covered by a high-deductible health plan, have no other disqualifying coverage, and not be enrolled in Medicare. Money goes in tax-free, either deducted on your return or taken out of your paycheck before tax. It grows tax-free. It comes out tax-free when used for qualified medical expenses: doctor and hospital bills, prescriptions, dental and vision care, and, once you are on Medicare, most Medicare premiums. Unlike a flexible spending account, there is no use-it-or-lose-it. The money stays yours from year to year and job to job.
Three ways in, one of them invisible
Through payroll, before tax. If you contribute through your employer’s cafeteria plan, the money is already left out of your taxable wages in Box 1 of your W-2. You will see the total, yours and your employer’s, in Box 12 with code W. You do not deduct it again, but it still has to be reported on Form 8889.
On your own. If you deposit money into your HSA directly, from your bank account rather than your paycheck, your W-2 does not reflect it at all. The only way to get the tax break is to claim it on your return, on Form 8889 and Schedule 1, line 13. This is the deduction people miss. Self-employed people, people whose employer does not offer payroll HSA deposits, and anyone who tops up the account before the April deadline all fall into this group. The bank sent a Form 5498-SA in May; the return was filed in March with the line blank.
Through payroll, after tax. Some employers take HSA contributions out of the paycheck after tax instead of through a cafeteria plan. Those amounts are included in W-2 wages and do not show up in Box 12, so they are deductible on the return the same as contributions you make on your own. Check the last pay stub of the year: if the HSA deduction is listed as post-tax, make sure it was claimed.
Worked example: what the missed line costs
A self-employed consultant with family coverage, married filing jointly in the 22% bracket, deposits $8,750 into the HSA during the year from the business checking account.
| Line 13 left blank | Line 13 claimed | |
|---|---|---|
| HSA deduction on Schedule 1 | $0 | $8,750 |
| Federal tax at 22% | $1,925 less | |
| Colorado tax at 4.40% | $385 less | |
| Total difference | $2,310 | |
| Side effects of the lower AGI | More room under the Marketplace cliff, the senior-deduction phase-out, and Colorado’s $75,000 / $95,000 line |
Three years of the same mistake is about $6,900, and all three can still be amended. The amended return takes one form and the 5498-SAs.
Other HSA mistakes preparers find
No Form 8889. It is required whenever there is an HSA contribution or distribution, including payroll contributions shown in Box 12 code W. Leaving it off can bring an IRS notice.
Deducting payroll contributions twice. The opposite error: claiming the Box 12 code W amount as a deduction when it was already excluded from wages.
Taxing medical withdrawals. Form 1099-SA reports money you took out. Withdrawals for qualified medical expenses are not taxable, but they have to be reported correctly on Form 8889 or they end up taxed, with a 20% penalty on top.
Contributing too much. Excess contributions are hit with a 6% penalty every year they stay in the account. This happens when both spouses contribute to family coverage, when someone changes jobs midyear, or when coverage changes.
Contributing while on Medicare. Once you are enrolled in any part of Medicare, you cannot contribute. If you sign up for Medicare after 65, Part A coverage is usually backdated up to six months, so stop contributions well ahead of enrolling.
The retirement angle
Nothing requires you to spend the money the year you put it in. Many people pay current medical bills from their checking account, let the HSA grow invested, and keep the receipts. Withdrawals for qualified medical expenses are tax-free whenever they are taken; you can reimburse yourself years later for any qualified expense incurred after the account was opened, with no deadline (verify). After Medicare starts, the account can pay Medicare Part B, Part D and Medicare Advantage premiums and long-term care premiums as well, though not Medigap (verify). Withdrawals for anything else are taxable, with a 20% penalty before age 65 and no penalty after. Kept that way, the account becomes a second retirement account set aside for the one expense that reliably grows with age.
If your employer offers a 401(k) match, take the full match first. After that, for many people the HSA is the best place for the next dollar, ahead of the rest of the 401(k).
Medicare and the last year
Once you enroll in Medicare, including Part A, you can no longer contribute. The limit for that year is prorated by the months before Medicare began (verify). People who sign up for Social Security after 65 are enrolled in Part A automatically, sometimes retroactively by six months, and contributions made in those months have to be pulled back out as excess (verify). Anyone working past 65 with an HSA should settle the timing before applying for benefits.
Behind the scenes
Form 8889 has to be filed whether the money went in through payroll or on its own. A preparer reconciles three numbers: the code W amount in Box 12 of the W-2, the contributions on Form 5498-SA, and the distributions on Form 1099-SA. When the 5498-SA total is bigger than code W, the difference is a personal contribution that belongs on Schedule 1. When the 1099-SA shows money out, the preparer asks what it paid for; the bank does not know, and the IRS assumes the worst until the return says otherwise. And for anyone 64 or 65, the question of when Medicare starts is asked before the contribution limit is applied.
The Colorado side
Colorado starts from federal taxable income, so the HSA deduction flows through and saves another 4.40%. The lower AGI also helps with Colorado’s own income lines: the $75,000 / $95,000 test for the 55-to-64 Social Security subtraction and the $300,000 deduction addback. Colorado has no HSA rules of its own; its old medical savings account subtraction was repealed in 2025.
What to bring your preparer
- Your W-2, for the Box 12 code W amount
- Form 5498-SA (it comes in May, so bring last year’s and tell your preparer what you deposited this year)
- Form 1099-SA and a note of what the withdrawals paid for
- Your final pay stub of the year if HSA deductions were taken after tax
- Whether your coverage was self-only or family, and for which months
- If you are 65 or older or applying for Social Security: your Medicare Part A start date
- Last year’s return, to check Schedule 1, line 13
Questions people ask
My employer put money in my HSA. Do I deduct it?
No. Employer contributions and your own pre-tax payroll contributions are already out of your wages. You report them on Form 8889 but do not deduct them again.
Can I still contribute for 2026 after the year ends?
Yes, until April 15, 2027, as long as you had eligible coverage during 2026. A contribution made in April for the prior year is one of the most common missed deductions, because it happens after the W-2 was issued.
Both my spouse and I have HSAs. Can we each put in $8,750?
No. The family limit is shared between you, $8,750 total, split however you like. Each spouse 55 or older can add their own $1,000 catch-up, but only into their own account.
I used HSA money for something that wasn’t medical. What happens?
It is taxed as income, plus a 20% penalty if you are under 65. Report it honestly on Form 8889; an unreported 1099-SA draws a notice.
I have Marketplace bronze coverage. Can I open an HSA?
Starting in 2026, yes; bronze and catastrophic Marketplace plans count as high-deductible plans for HSA purposes. The contribution lowers the income that sets your premium credit too.
Check last year’s Schedule 1, line 13
If you put money into your HSA yourself, or through after-tax payroll, and that line is blank, the return can be amended for up to three years. It is the most common fix a preparer makes on a return prepared somewhere else.