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Contributing to your HSA today could lower your tax bill

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Here’s some good news for people who had a Health Savings Account (HSA) last year – you can still contribute to the account if you haven’t already reached your 2020 maximum contribution limit. Advantageous to pay for medical expenses, because employer contributions are not included in your taxable income, income is tax-free, and distributions are not taxed if you use them to pay for eligible medical expenses. In addition, you may also be entitled to a deduction (or a larger deduction) on your 2020 tax return. These are all good reasons to contribute as much as possible to your HSA for 2020.

But here’s the catch: you only have a few hours left to take this step. You have until the tax filing deadline to make HSA contributions for the previous calendar year. In most years, this deadline falls on April 15th. However, this year (like last year) the tax filing due date has been extended as part of the IRS response to the COVID-19 pandemic. So now you have until May 17th to contribute to an HSA for 2020. Today is… so you need to act fast!

(For other tax due dates today, see 9 tax deadlines for May 17.)

For 2020, you can contribute up to $ 3,550 to an HSA if you have individual coverage. If you have family coverage, the maximum is $ 7,100. Anyone 55 years of age or older at the end of 2020 can make an additional $ 1,000 in “catch-up” contributions for the year. (For all contribution limits from 2017 to 2022, see HSA contribution limits and other requirements.)

The contribution ceilings can however be reduced. If your employer makes contributions to your HSA that are excluded from your income – including amounts contributed through a cafeteria plan – those contributions are counted against your overall limit. In this case, the amount you may contribute to your HSA being lower.

If you haven’t hit your limit, definitely consider making a quick HSA contribution today if you have extra income available (for example, from a stimulus check). But don’t go over your limit! There is a 6% penalty on excess contributions. And this penalty applies each year the excess contribution remains in your account.

If you accidentally put too much money in your HSA account for 2020, you can withdraw the excess amount and avoid the penalty if you:

  • Withdraw the excess before May 17 or before October 15 if you are requesting an extension of the tax return; and
  • Withdraw any income earned on withdrawn contributions and include the income in “Other income” on your 2020 tax return.

If you don’t withdraw your excess contributions, you may be able to claim tax relief for them later. Excess contributions from previous years that are still in your HSA account may be deducted, but the deduction is limited to the lesser of (1) your maximum HSA contribution limit for the year less the amounts actually contributed for the year, or ( 2) the total excess contributions in your HSA at the start of the year.

As mentioned above, you may be able to deduct your 2020 HSA contributions on your 2020 tax return (up to the maximum contribution limit). And you don’t have to itemize to claim this tax break. Instead, your contributions are reported as an income adjustment on line 12 of Schedule 1 (Form 1040). You must also submit Form 8889 with your tax return. So, it might be wise to put more money into your HSA for 2020 today if you haven’t already reached your contribution limit. This is especially true if you plan to contribute to the account soon anyway. This way you will get that extra deduction for 2020 and save more space for 2021 contributions.

There are a few limitations, however. For example, you cannot deduct HSA contributions made by your employer, including pre-tax funds contributed through payroll deductions. You also cannot claim the deduction if someone else can claim you as a dependent on their tax return. Distributions from an IRA that are paid to your HSA as part of a direct trustee-to-trustee transfer are also not deductible. See the instructions on Form 8889 for all the rules.

If you’ve already filed your 2020 tax return, you can file an amended tax return after the May 17 tax deadline to claim a new or increased HSA deduction if you add more to your account at the last minute. You usually have three years from the date you filed your original return or two years from the date you paid any tax owing to file an amended return (use the later date). We recommend that you file your amended return electronically, as it will be processed much faster. Once you have filed an amended return, you can track its status online using the “Where is my amended return?” Tool. From the IRS. tool or by calling 866-464-2050.

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