What is the tax treatment of HSA contributions and withdrawals?
Individuals who contribute to HSAs may claim a deduction on their federal income tax return. It is an “above the line” deduction, which means that the deduction for HSA contributions is used in determining adjusted gross income (AGI). Thus, it may be taken by all eligible taxpayers, whether they itemize deductions or take the standard deduction. Contributions made by employers are excluded from gross income of employees in determining their income tax liability. Withdrawals from HSAs are exempt from federal income taxes if used for qualified medical expenses. Those dollars not used for qualified medical expenses are included in gross income on your federal income tax form and are also subject to a 10% penalty tax. The penalty is waived in cases of disability or death and for individuals age 65 and older. After age 65, the money can be used without penalty for non-medical purposes.
