I'm self-employed. How does an HSA reduce my taxable income - What is deductible?: Total contributions? Or just whatever is leftover in the HSA after qualified expenses?

[ufd]

I have a high deductible health plan, and I'm trying to determine if opening an HSA would help reduce my taxable income. 

At tax time, what is deductible?: The total amount I contributed to the HSA during the tax year, or whatever is remaining in the HSA account after subtracting qualified health expenses?

Since I'm self-employed, relatively healthy, and don't have much to contribute to an HSA, I'd only be contributing $500/yr at the most, and would expect to use up whatever I've contributed - Meaning, there wouldn't be any balance in my HSA to roll over into the next tax year.

If I use my HSA in this way, is there any real tax benefit?

[Opus 17]

The amount you deposit (contribute) to the HSA is subject to self-employment tax but is excluded from income tax.  Withdrawals from the account are non-taxable if you use them for qualifying medical expenses.  Any income earned by the account (interest or dividends) is tax free.  

The balance of the account has nothing to do with it.  The idea of an HSA is that you can make tax-free contributions over time that accumulate and can be used to pay big expenses later on.

[TomYoung · Accepted solution]

Contributions to your HSA reduce your taxable income as the contributions show up as deductions on line 25 - "Health savings account deduction" - of your Form 1040 in calculating your taxable income.  Any amount you take out of your HSA and use for qualified medical expenses are also tax free to you.  So the tax benefit is associated with the gross contribution, not the "net" after distributions.

Tom Young

[ufd]

Thanks for your help!

[Carl]

Generally speaking, money contributed to an HSA is before tax money. Depending on the plan setup all contributed monies must be spent on qualified medical expenses prior to March 15 (or thereabouts) of the next tax year. Any monies contributed to an HSA not used by that date for qualified expenses is subject to taxes and (again, depending on the setup) may also be subject to penalties in addition to the taxes.
This is just a *g*e*n*e*r*a*l* explanation. Different rules apply to different plans and those rules can be affected by what type of business you have, what state you're in and other factors. You'd be best to consult with a tax professional in your local jurisdiction to get the facts as they will apply to your specific situation and setup.

[TaxGuyBill]

Money in a HSA can be used tax-free forever (if used for qualified medical expenses).
An FSA has other limitations, and may be required to be used by March 15th (depending on the plan).

[Carl]

Thanks for clarifying that TGBill.