The mistake we see most. Of all the errors people make preparing their own tax returns, missing the HSA deduction is the one I find most often. Every year I get to show clients a deduction they were entitled to and didn’t take, and some of those returns were prepared by someone else. HSA reporting trips up tax preparers too.
What an HSA is
A Health Savings Account is a savings account for medical expenses that you can open if you’re covered by a high-deductible health plan (HDHP) and have no other disqualifying coverage. It has a tax advantage no other account has, all three at once:
- Money goes in tax-free. Contributions are either deducted on your return or taken out of your paycheck before tax.
- It grows tax-free. Interest and investment earnings aren’t taxed while they stay in the account.
- It comes out tax-free when you use it for qualified medical expenses: doctor and hospital bills, prescriptions, dental and vision care, and, once you’re on Medicare, most Medicare premiums.
A 401(k) or traditional IRA gives you the first two. A Roth gives you the last two. An HSA gives you all three. Unlike a flexible spending account, there’s no “use it or lose it.” The money stays yours from year to year and job to job.
2026 contribution limits
| Coverage | 2026 limit |
|---|---|
| Self-only HDHP | $4,400 |
| Family HDHP | $8,750 |
| Extra catch-up, age 55 and older | $1,000 |
The limits include what your employer puts in. You can make contributions for 2026 until the tax filing deadline in April 2027. Starting in 2026, bronze and catastrophic plans bought through the Health Insurance Marketplace also count as HSA-eligible coverage, which opens HSAs to many more self-employed people.
Where people miss the deduction
How your contribution shows up on your return depends on how you made it:
- 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’ll see the total, yours and your employer’s, in Box 12 with code W. You don’t 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 doesn’t 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. This is the deduction people miss. Self-employed people, people whose employer doesn’t offer payroll HSA deposits, and anyone who tops up the account before the April deadline all fall into this group.
- Through payroll, after tax. Some employers take HSA contributions out of your paycheck after tax instead of through a cafeteria plan. Those amounts are included in your W-2 wages and don’t show up in Box 12, so they’re deductible on your return the same as contributions you make on your own. Check your last pay stub of the year: if the HSA deduction is listed as post-tax, make sure it was claimed.
On a $4,400 contribution, a missed deduction can easily cost $500 to $1,000 or more in federal and Colorado tax combined.
Check last year’s return. Did you put money into your HSA yourself, or through after-tax payroll deductions? Pull out your return and look at Schedule 1, line 13, “Health savings account deduction.” If it’s blank and you made either kind of contribution, you likely missed the deduction. Returns can generally be amended for three years, so it isn’t too late. Call us at 303-734-1040 and we’ll take a look.
Other HSA mistakes we see
- No Form 8889. It’s required whenever there’s 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 aren’t taxable, but they have to be reported correctly on Form 8889 or they can end up taxed.
- Contributing too much. Excess contributions are hit with a 6% penalty every year they stay in the account. This often happens when both spouses contribute, when someone changes jobs midyear, or when coverage changes.
- Contributing while on Medicare. Once you’re enrolled in any part of Medicare, you can’t 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.
Using an HSA for retirement
If you can afford to pay current medical bills out of pocket and leave the HSA alone, it becomes a powerful retirement account. Many HSA providers let you invest the balance, and health care is one of the largest costs in retirement. Save your receipts: you can reimburse yourself years later for any qualified expense incurred after you opened the HSA, with no deadline.
After 65, you can take money out for anything. Withdrawals for non-medical expenses are taxed as income, like a traditional IRA, but without penalty. Before 65, non-medical withdrawals are taxed plus a 20% penalty.
If your employer offers a 401(k) match, take the full match first. After that, for many people the HSA is the next best place for the next dollar.
Related topics
- Tax Breaks for Retirement Savers
- Itemized Deductions vs. the Standard Deduction — for medical expenses paid outside an HSA.
Not sure your HSA was handled right? Bring us last year’s return, your W-2, and any Forms 5498-SA and 1099-SA. We’ll check it and tell you whether an amended return is worth filing. Call 303-734-1040.