There are three key tax benefits to a Health Savings Account (HSA). Money goes into and comes out of an HSA tax-free (as long as funds are used to pay for qualified medical expenses).
- Contributions to HSAs are not subject to federal income taxes.*
- Earnings to an HSA from interest and investments are tax-free.
- Distributions from an HSA to pay for qualified medical expenses are tax-free.
Your personal contributions offer you an “above-the-line” deduction. An “above-the-line” deduction allows you to reduce your taxable income by the amount you contribute to your HSA. You do not have to itemize your deductions to benefit. Contributions can also be made to your HSA by others (e.g., relatives). However, you receive the benefit of the tax deduction.
*Contributions to HSAs may be subject to state taxes in Alabama, California and New Jersey. For more information consult with your state department of revenue.