Reducing 2022 Income Tax Liability is Still Possible with an HSA

Every January, employees receive W-2 forms from their employers and collect other information necessary to file their yearly income taxes. After they start crunching numbers, the amount of tax they owe the IRS may come as an unpleasant surprise. Unfortunately, once a tax year is closed, there are not a lot of ways to reduce that tax bill, compared to the options that were available during the tax year. 

For a taxpayer seeking some last-minute deductions, a prior-year HSA contribution can help to realize crucial tax savings. Prior-year contributions can be made until the tax filing deadline, which is April 18, 2023 this year. Prior-year contributions can be used right away, used to pay near-term medical expenses, or saved for future medical events.   

There are a few things to keep in mind when making a prior-year HSA contribution:

  • The 2022 contribution limit is determined based on the type of HSA-compatible health plan coverage during the year. Eligible individuals who had single coverage can contribute up to $3,650. Those with family coverage can contribute up to $7,300.
  • An additional $1,000 catch-up contribution can be made for those who are age 55 or older by the end of the tax year.
  • For individuals who are married and have family coverage, both the account holder and their spouse may contribute to their own HSAs, but their combined contributions for the year cannot exceed the family limit (plus the catch-up amounts, if applicable).
  • Those not covered by an HSA-compatible health plan for the entire year may need to reduce the annual limit according to the number of months they were actually eligible.

Contributions that were made in this way must be deducted on Form 8889 when the tax return is filed. Contributions that were deducted from a paycheck throughout the year do not need to be deducted with Form 8889 – the employer has already adjusted the W-2 to reduce the employee’s income accordingly. 

In addition to reducing federal income taxes, in many states HSA contributions can also reduce the state tax bill. Individuals should check with a tax advisor to see if their HSA contribution can provide additional state income tax relief. 

It is never too late to start thinking about how to minimize your annual tax bill. No need to wait to make a prior-year contribution; increase salary deductions now to minimize next year’s tax liability.