What Is an Allowable HSA Deduction?

Contribution Limits

The IRS determines the tax deductible amount that can be contributed to an HSA each year. The contribution amount is indexed against inflation and is reset in the fall for the upcoming year. For 2011, individuals can contribute $3,050 into an HSA, and those with a family HSA plan have a limit of $6,150. These limits are the total permitted deposits for the year from all sources, the account holder, employer or others who choose to make deposits into an HSA on behalf of someone else.

All contributions to an HSA are tax deductible to the account holder, with the exception of contributions made by an employer on behalf of an employee. These contributions are tax deductible to the employer and are not added to the employee's gross W-2 income.

Contributions from all sources will be documented on IRS Form 8889 when filing your 1040 or 1040NR income tax return. The custodian of your HSA will report the information to the IRS, as well. If you fail to include Form 8889 with your income tax return, the IRS will disallow the deduction for the contributions and include that amount in your taxable income.

If there are contributions into an HSA that exceed the annual limit, the IRS considers these to be "excess contributions." If you discover the error before filing your tax return, you can withdraw the excess contribution amount, along with any earnings on the excess contributions, without penalty. Include any earnings from the excess contributions as "other income" on your tax return. If you find the error after filing your return, the excess contributions and earnings will be subject to a 6 percent excise tax.