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Form 8889 for Health Savings Accounts (HSAs)

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Health Savings Accounts (HSAs) were created in 2003 as a means of addressing increasing health care costs. HSAs give individuals enrolled in high-deductible health plans (HDHPs) tax-preferred treatment for money saved for medical expenses. In general, HSAs allow for individuals to defer taxes when money is contributed (even if a taxpayer does not itemize on Form 1040 Schedule A), and money that is eventually withdrawn and used to pay for qualified medical expenses is also usually tax-free.

In this article, we will explain the basics of Form 8889 for HSAs. This explanation is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions.

Form 8889

Form 8889 is used for all of the following purposes: to report health savings account (HSA) contributions (including those made on behalf of taxpayers, and employer contributions), to report distributions from HSAs, to calculate the correct HSA deduction amount, and to calculate the amounts that taxpayers must include in income and any additional tax that may be owed if a taxpayers fails to qualify as an eligible individual. The IRS defines an HSA as, “[A] health savings account set up exclusively for paying the qualified medical expenses of the account beneficiary or the account beneficiary’s spouse or dependents.” In general, distributions received from an HSA to pay for “qualified medical expenses” (see IRS publications for the specific definition) of an account beneficiary, a spouse, or dependents are excluded from the determination of gross income.

For the 2013 tax year, Form 8889 must be filed under any of the following circumstances: if a taxpayer (or somebody on behalf of a taxpayer, such as an employer) made contributions to an HSA in 2013, if HSA distributions were received in 2013 by a taxpayer, if a taxpayer failed to be deemed an eligible individual during the applicable testing period and certain amounts must therefore be included in the taxpayer’s income, or if an interest in an HSA was acquired due to the death of the account beneficiary. The testing period begins with the month a contribution to a qualified HSA is made, and ends on the last day of the twelfth month following that month.

Subject to certain exceptions, taxpayers who fail to remain eligible individuals must include the qualified HSA funding distribution in income in the year in which they do not meet the eligibility requirement, (and this amount is also subject to a 10% Additional Tax for Failure to Maintain HDHP Coverage).

HSA Deductions

In general, the maximum amount that one can contribute to a HSA plan is dependent upon the type of HDHP coverage that an individual has (For 2013 and 2014, HDHPs require minimum annual deductibles of at least $1,250 for individuals and $2,500 for families). For individuals who have self-coverage, the maximum contribution for 2013 is $3,250, and taxpayers with family coverage, the maximum amount that may be contributed is $6,450. (For 2014, the contribution limit is raised to $3,300 for individuals HSAs, and $6,550 for family HSAs). Individuals who are at least 55 years of age as of the end of their tax year may make an additional catch-up contribution of $1,000 (and this amount will be unchanged for 2014). The maximum HSA contribution amount, however, is reduced by any employer contributions to an HSA, and contributions made to an Archer MSA, and any qualified HSA funding distributions.

In addition, any contributions made to an HSA during the month in which a taxpayer was enrolled in Medicare will not be deductible. Further, HSA contributions are not deductible if a taxpayer can be claimed as a dependent on Form 1040 by somebody else.

Retirement Savings Contributions Credit 2013

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You may be eligible for a tax credit if you make eligible contributions (other than rollover contributions) to an employer-sponsored retirement plan or to an individual retirement arrangement.

Eligible Plans

The eligible plans for the retirement savings contribution credit include: traditional and Roth IRAs, 401(k), 403(b), governmental 457, SEP, SIMPLE, 501(c)(18)(D) and contributions to a qualified retirement plan as defined in section 4974(c) (including federal Thrift Savings Plan).

Additional Requirements and Limitations

Other important eligibility requirements and limitations include:

1. Income Limitations

You cannot exceed the following income limits in order to be able to take the Retirement Savings Contributions Credit (these are 2013 numbers):

• Single, married filing separately, or qualifying widow(er), with income up to $29,500

• Head of Household with income up to $44,250

• Married Filing Jointly, with income up to $59,000

2. Age Limitation

To be eligible for the Retirement Savings Contributions Credit you must have been born before January 2, 1996.

3. Full-Time Students Not Eligible

You cannot have been a full-time student during the calendar year if you wish to claim the Retirement Savings Contributions Credit (there are some specific definitions regarding the “student” status).

4. Cannot Be a Dependent on Another Person’s Tax Return

If you were claimed as a dependent on someone else’s 2013 tax return, you cannot take the Retirement Savings Contributions Credit.

5. Distributions are Deducted From Contributions

When figuring the Retirement Savings Contributions Credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.

Credit amount

If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

Also note that the Retirement Savings Contributions Credit is a benefit in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA.

Tax Return Extension Deadline for Most Filers: October 17, 2011 and Some Exceptions

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October 17, 2011 is the deadline for most of those individual taxpayers who filed Form 4868 to request a six-month extension on filing of their tax returns. Traditionally, October 15 would have been the deadline, but it falls on Saturday this year. Therefore, the IRS extended the deadline until October 17, 2011.

Note that this deadline of October 17, 2011, includes U.S. taxpayers living abroad, even though their tax filing deadline is automatically extended to June 15. It is also important to emphasize that the extension to file your federal tax return does not in any way affect the obligation to file the FBARs by June 30, 2011.

Some taxpayers, however, are not subject to October 17, 2011 deadline this year. The two most prominent exceptions are qualified military personnel and victims of Hurricane Irene. Victims of Hurricane Irene will have until October 31, 2011 to file their tax returns. The new deadline primarily concerns residents of certain counties in Connecticut, Massachusetts, North Carolina, New Hampshire, New Jersey, New York, Pennsylvania, Puerto Rico, Texas, and Vermont.

It is important to emphasize that an extension of time to file is not equivalent to an extension of time to pay. It is generally true that, under the relevant Treasury regulations and IRS Notice 93-22, individual taxpayers still can file a valid Form 4868 and obtain an automatic extension without paying the properly estimated tax in full – this means, of course, that no late filing penalty is likely to be assessed. However, the taxpayers will still owe interest on any past due tax amount and may be subject to a late payment penalty if payment is not made by the regular due date of the return.

Underpayment and Overpayment Interest Rates for the Fourth Quarter of 2011

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On August 18, 2011, the Internal Revenue Service announced that interest rates will decrease for the calendar quarter beginning October 1, 2011. The rates will be:

  • three (3) percent for overpayments (two (2) percent in the case of a corporation);
  • three (3) percent for underpayments;
  • five (5) percent for large corporate underpayments; and
  • zero and one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. These rates determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Rev. Rul. 2011-18. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. Pursuant to I.R.C. section 6621(c), the rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. See section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 567, and 571. Interest factors for daily compound interest for an annual rate of 0.5 percent are published in Appendix A of Revenue Ruling 2010-31, 2010-52 IRB 898, 899. 3.

Contact Sherayzen Law Office

If you have any questions with respect to IRS interest rates and any other tax-related concerns, you should contact our experienced tax firm to discuss your case.

Tax Attorney Minneapolis | Keeping Tax Records After Filing Your Tax Return

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Once in a while, I get a question from my clients on how long and what type of records they need to keep after they file their tax returns.  Generally, you should keep any and all documents that may have an impact on your federal tax return. For example, it is a good idea to keep bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

If you are self-employed, you are probably likely to keep a much larger pile of documents than other individual clients.  The documents should generally include all revenue records, expense records, depreciation records, and so on.  You should consult a tax professional on what type of records you should keep and how long.

Most individual taxpayers will need to keep their tax records for at least three years.  Some documents –  such as those related to a home purchase or sale, stock transactions, business property records – should be preserved for a longer period of time.

Generally, I advise my clients to err on the side of keeping the documents.

If you have any questions on whether you should keep a given documents, you should consult your accountant or a tax attorney.