The following information is from IRS.gov and is very beneficial to those who have an HSA account.

You may enjoy several benefits from having an HSA. Here are some of the benefits:

  • You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.
  • Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
  • The contributions remain in your account from year to year until you use them.
  • The interest or other earnings on the assets in the account are tax free.
  • Distributions may be tax free if you pay qualified medical expenses. See qualified medical expenses below.
  • An HSA is “portable” so it stays with you if you change employers or leave the work force.

Qualified medical expenses.  Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for HSA purposes.

For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.

If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses.

Qualified medical expenses are those incurred by the following persons.

1.      You and your spouse.

2.      All dependents you claim on your tax return.

3.      Any person you could have claimed as a dependent on your return except that:

a.       The person filed a joint return,

b.      The person had gross income of $3,650 or more, or

c.       You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2009 return.

For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child’s exemption.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.

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