When You Have to Pay Taxes on HSA Withdrawals

HSA distributions are tax-free only when you use the money for may have access to medical expenses

Money you withdraw from a Health Savings Account is not taxed if you spend it on may have access to medical expenses. If you withdraw money for any other reason, you owe income tax on that amount, plus a 20 percent penalty tax on top of it — unless you are 65 or older, disabled, or covered by Medicare.

The IRS publishes a specific list of what counts as a may have access to medical expense. It includes doctor visits, prescription drugs, dental work, vision care, and many medical devices and supplies. It does not include health insurance premiums (with a few exceptions), over-the-counter medicines without a prescription, or cosmetic procedures. The line between what qualifies and what does not is sometimes unclear, which is why many people make mistakes on this one.

The tax consequences of getting it wrong are steep enough that it is worth understanding the rules before you withdraw money, especially if you are using your HSA for something other than immediate medical bills.

Key Takeaways

• Withdrawals for may have access to medical expenses carry no income tax and no penalty, regardless of your age or how long the money has been in the account.
• Withdrawals for non-medical reasons are taxed as ordinary income plus a 20 percent penalty, except for people 65 and older, who pay only the income tax.
• The IRS maintains a detailed list of may have access to expenses; common mistakes include withdrawing for health insurance premiums, over-the-counter medicines, and cosmetic procedures.
• You do not need to submit receipts to your HSA provider when you withdraw, but you must keep them for your tax records in case the IRS asks.
• Once you turn 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.

How the tax-free withdrawal rule actually works

A may have access to medical expense is one that treats, diagnoses, or prevents a medical condition, or that relieves pain or suffering from a medical condition. The expense must be for you, your spouse, or a dependent you claim on your tax return. The person receiving the care does not have to be the account owner.

The IRS does not require you to prove the expense when you withdraw the money. Your HSA provider will not ask for a receipt. But you must keep receipts and documentation for at least three years after you file your tax return, because the IRS can audit your HSA withdrawals just like any other part of your return. If you cannot show that a withdrawal was for a may have access to expense, you will owe back taxes plus penalties and interest.

The timing does not matter. You can withdraw money from your HSA years after you paid the medical bill, as long as the bill was for a may have access to expense. Some people use their HSA as a long-term investment account and reimburse themselves for old medical bills decades later. This is legal, though it requires careful record-keeping.

What counts as a may have access to medical expense

may have access to expenses include doctor visits, hospital stays, surgery, prescription drugs, dental work, vision care, hearing aids, crutches, wheelchairs, and many other medical devices and supplies. Mental health treatment, including therapy and psychiatric medication, qualifies. Fertility treatment, including in vitro fertilization, qualifies. Addiction treatment qualifies. Chiropractic care qualifies if it treats a medical condition.

The list is long. The IRS publishes Publication 502, which details hundreds of expenses. Some examples that surprise people: insulin, even without a prescription; menstrual products; sunscreen; and certain home modifications made for medical reasons, like a ramp for someone in a wheelchair.

Over-the-counter medicines do not may have access to unless you have a prescription from a doctor, even if the medicine is one you could buy without a prescription. Vitamins and supplements do not may have access to unless they treat a specific medical condition and you have a doctor's recommendation. Cosmetic procedures do not may have access to, even if they are performed by a medical professional. Gym memberships and fitness equipment do not may have access to, even if your doctor recommends exercise.

The penalty for non-may have access to withdrawals

If you withdraw money from your HSA for something other than a may have access to medical expense, you owe income tax on that amount at your ordinary tax rate, plus a 20 percent penalty. The penalty is in addition to the income tax, not instead of it. So if you withdraw $1,000 for a non-may have access to expense and your tax rate is 22 percent, you owe $220 in income tax plus $200 in penalty, for a total of $420.

The exception is age 65 and older. Once you turn 65, you can withdraw money from your HSA for any reason without the 20 percent penalty. You still owe income tax on non-medical withdrawals, but the penalty goes away. This is one reason some people treat their HSA as a retirement account — after 65, it functions like a traditional IRA, except that withdrawals for medical expenses remain tax-free.

If you are disabled or covered by Medicare before age 65, you also avoid the 20 percent penalty on non-may have access to withdrawals, though you still owe income tax on them.

How to report HSA withdrawals on your tax return

Your HSA provider will send you a Form 1099-SA each year showing the total amount you withdrew. You report this on Form 8889, which is the IRS form for HSA activity. On Form 8889, you list the total withdrawals and then subtract the may have access to medical expenses you paid that year. The difference is the non-may have access to withdrawal amount, and that is what gets added to your taxable income.

This means you need to track your may have access to medical expenses separately from your withdrawals. If you withdrew $5,000 but only $4,200 of it was for may have access to expenses, you report $800 as taxable income. You do not need to list every individual expense on your tax return, but you do need to know the total and be able to prove it if audited.

If you made a non-may have access to withdrawal, you also owe the 20 percent penalty tax on the non-may have access to amount. This is calculated on Form 8889 as well. The penalty is reported as an additional tax on your return.

Mistakes people make with HSA withdrawals

One common mistake is withdrawing for health insurance premiums. Most health insurance premiums do not may have access to, including premiums for your employer's health plan, a marketplace plan, or a private plan. The exceptions are narrow: COBRA premiums, premiums for coverage while you are receiving unemployment benefits, and long-term care insurance premiums (up to a limit). If you withdraw HSA money to pay your regular monthly health insurance premium, that withdrawal is taxable and subject to the penalty.

Another mistake is withdrawing for over-the-counter medicines without a prescription. Aspirin, cold medicine, allergy medicine, and antacids do not may have access to unless a doctor writes a prescription for them. Many people assume that because these medicines treat medical symptoms, they must may have access to. They do not.

A third mistake is withdrawing for dependent care or childcare. These do not may have access to as medical expenses, even though they may be necessary for your family. Dependent care accounts (DCAs) and Flexible Spending Accounts (FSAs) cover childcare; HSAs do not.

How to keep records for HSA withdrawals

Keep receipts, invoices, and explanation of benefits (EOB) statements for every medical expense you pay with HSA money or reimburse yourself for later. Store them in a folder or digital file organized by year. Include the date, the provider's name, the amount, and what the expense was for.

If you withdraw money and do not immediately use it for a medical expense, write down what you plan to use it for and keep that note with your records. If you reimburse yourself for an old medical bill, keep the original receipt and a note showing when you withdrew the money and when you reimbursed yourself.

The IRS can audit HSA withdrawals for up to three years after you file your return, sometimes longer if there is a substantial error. Having clear, organized records makes it much easier to respond to an audit and prove that your withdrawals were for may have access to expenses.

Frequently Asked Questions

Can I withdraw HSA money and pay it back later without taxes?

No. Once you withdraw money, it is either for a may have access to expense (tax-free) or it is not (taxable plus penalty). You cannot withdraw money tax-free and then decide later whether it was for a may have access to expense. The qualification is determined by what you actually use the money for, not by your intention when you withdraw it.

What if I withdraw money for a medical expense but do not have a receipt?

You can still claim it as a may have access to withdrawal if you can reconstruct proof of the expense. An explanation of benefits from your insurance company, a credit card statement showing a charge to a medical provider, or a cancelled check can all serve as proof. The IRS does not require a specific form of documentation, just something that shows the expense was real and medical in nature.

Do I have to report small withdrawals on my tax return?

Yes. Every withdrawal is reported on your Form 1099-SA, and you must account for all of it on Form 8889. There is no threshold below which withdrawals are ignored. Even a $50 withdrawal for a non-may have access to expense must be reported and is subject to tax and penalty.

What happens if I accidentally withdraw for a non-may have access to expense?

You owe income tax and the 20 percent penalty on that amount. Some people ask their HSA provider to reverse the withdrawal, but this is not always possible depending on the provider and the timing. If you realize the mistake before filing your tax return, you can report it correctly and pay the tax and penalty. If the IRS discovers it during an audit, you also owe interest on the unpaid taxes.

Can I use HSA money to pay for my spouse's medical expenses?

Yes. may have access to medical expenses for your spouse count as may have access to expenses for your HSA, even if your spouse does not have their own HSA. The same rule applies to dependents you claim on your tax return. You do not need to be the person receiving the medical care for the withdrawal to be tax-free.