When you have a Health Savings Account (HSA) or Medical Savings Account (MSA) the distributions you take out to pay for qualified medical expenses are not subject to federal income tax. But you need to report your contributions to the account and the distributions you receive from the account on your federal income tax return.
If your employer makes contributions to your HSA or MSA, those contributions are generally not taxable. And you can claim a deduction for the contributions you make to your own HSA or MSA account, whether or not you itemize deductions.
You should receive a Form 1099-SA from the HSA or MSA account trustee or payer, reporting the distributions from the account during the year.
If you have an HSA you would report your contributions and distributions on Form 8889 and if you have an MSA you would use Form 8853. If you use tax software with an interview process to prepare your return, these forms should be generated automatically based on your answers to questions about these types of accounts.
The contributions you make to your HSA, reported on Form 8889, are shown as a deduction on line 25 of Form 1040. Contributions to an MSA, reported on Form 8853, are shown as a deduction on line 36 of Form 1040.
Medical expenses that qualify for HSA or MSA purposes are generally the same medical expenses that you could claim as an itemized deduction on Schedule A if you were to itemize deductions. You should keep in mind that according to the IRS, medicines and drugs are considered qualified medical expenses for HSA or MSA purposes only if they require a prescription, if they are available over the counter but you get a prescription, or if the medicine is insulin.
Distributions you take from an HSA or MSA that are not used to pay for qualified medical expenses must be included in your return as taxable income and may also be subject to an additional tax of 20%. These distributions, reported on either Form 8889 for an HSA or Form 8853 for an MSA, would be reported on line 21 of Form 1040 as Other Income, indicating either HSA or MSA, as applicable.
The additional 20% tax, calculated on Form 8889 or 8853, would be added to line 60 of Form 1040 for Other Taxes, indicating either HSA or MSA.
According to the IRS, the 20% additional tax does not apply if the distributions were made after the account beneficiary dies, becomes disabled, or turns age 65.
Sources:
Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts
Form 8889, Health Savings Accounts (HSAs)
Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts
Instructions for Form 8889, Health Savings Accounts (HSAs)
Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
