Various tax incentives are available to save money on medical care costs and reduce the taxes you need to pay.
IRS Form 1099-SA is one form that you use to save from taxes only if you spend your savings on qualified medical expenses.
Officially known as ‘Distributions From a Health Savings Account, Archer Medical Savings Account, or Medicare Advantage Medicare Savings Account,’ 1099-SA is the form you receive to include a distribution or funds you used from an HSA, Archer MSA or MA MSA on your federal taxes. This form also includes information to report the inheritance of accounts by estates, spouses, or non-spouses.
Depending on the distributions you receive from each type of account, you’ll receive a 1099-SA form and need to file certain tax forms accordingly.
However, if you want to report long-term benefits to the IRS and accelerated death benefits from a life insurance policy, you must use Form 1099-LTC.
If you spend the withdrawn funds from an HSA, MA MSA, or Archer MSA on qualifying health expenses for the account beneficiary or the beneficiary’s dependents, you can get a reprieve from certain taxes.
If your HSA account has matured, you can roll over to another HSA account, which means transferring the holdings to the next account without paying taxes. You can also roll over your MSA to another MSA or an HSA.
If you take a distribution from an HSA account, you must report it in Form 8889 and attach it to your tax return. But if the 1099-SA indicates that you used the distribution for non-qualified medical expenses, you’ll need to pay income taxes on the amount used for the unqualified spending.
You should report the taxable amount in the ‘other income’ section of your tax return and mention ‘HSA’ beside it.
On the taxable portion of the distribution you used, you have to pay an additional 20 percent, which you’ll calculate on the 8889 form.
The consequences for MSA distributions used for nonqualified medical expenses are the same as that of HSA. However, the distribution you take from the Archer MSA or MA MSA account must be reported in Form 8853.
The calculation for the nonqualified portion will be the same as HSA in your tax return, mentioning ‘MSA’ beside the other income section.
In order to contribute to an MSA or HSA account, you must be covered under a High Deductive Health Plan (HDHP). You can’t be on Medicare and shouldn’t be claimed as a dependent.
As an employee, your employer is eligible to make tax-free deductions.
Three copies of the 1099-SA are available: Copy A, which is filed by the institution that’s managing your account; Copy B, which is sent to you by mail; and Copy C, which the financial institution retains.
If you don’t receive the form timely, you must contact the institution to report it.
You don’t need to submit the form with your tax returns. Instead, you should keep it with you for record-keeping purposes.
The financial institution handling your 1099-SA form can file it electronically with special software that generates files according to the instructions of the IRS.