If you aren't the deceased's spouse, when you inherit an HSA the value of that HSA at the owner’s death is taxable income that year. You can offset this tax liability by paying the deceased’s medical bills within a year of death. You are not taxed on any inherited HSA money you use to pay the deceased medical bills, as long as you do it within 12 months. If you didn't/don't pay the medical expenses of the deceased, your inherited HSA is taxable. The taxable amount would be the amount in Box 1, that should have been distributed to you.
The fact that the Health Savings Account did not earn any income is not unusual. Many, if not most employer HSA plans do not pay any interest and offer no investment options for the funds in the HSA.
- When you enter your Form 1099-SA, answer the question "Did you spend your HSA money on medical expenses only, answer "No, I didn't." and then indicate you didn't spend any of it on medical expenses.
- After entering that question, you'll land on the "Here's what we have so far" screen. Click on Done
- Next screen should be "Now let's work on [your] HSA" click on Continue
- Answer "Yes" when asked if you inherited the HSA
- If you didn't pay any medical bills for the deceased, enter zero, and enter zero for the HSA account value on December 31, 2024.
- Answer No, when asked if you put money in an HSA
- Answer the Medicare question
- For "Report Death or Disability Exception" enter the total amount of your HSA distribution
- The amount you received from your inherited HSA will appear as taxable income on Schedule I of Form 1040 on line 8.f.
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