Health care costs can put a significant dent in your budget—but did you know that you can use special tax-advantaged accounts to pay for these expenses and potentially increase your tax refund? Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are powerful tools that not only help you manage out-of-pocket medical costs but also provide excellent tax benefits. Whether you’re employed, self-employed, or part of a family plan, understanding how to use an HSA or FSA properly can save you hundreds—or even thousands—on your taxes every year. In this blog, we’ll explore how these accounts work and how to strategically use them to lower your tax bill and boost your refund.
What Is an HSA (Health Savings Account)?
An HSA is a tax-advantaged savings account available to individuals who are enrolled in a high-deductible health plan (HDHP). It allows you to set aside pre-tax money to pay for qualified medical expenses, including copays, prescriptions, dental care, vision services, and more.
Key features of an HSA:
- Contributions are tax-deductible (or pre-tax via payroll)
- Earnings grow tax-free
- Withdrawals for qualified medical expenses are tax-free
- Funds roll over year to year with no expiration
- HSA funds can be invested for growth
HSAs function like a triple tax-advantaged retirement tool, making them one of the most powerful savings options available.
What Is an FSA (Flexible Spending Account)?
An FSA is another type of tax-advantaged account that allows you to use pre-tax dollars to pay for qualified out-of-pocket health care expenses. FSAs are typically offered through employers and work similarly to HSAs, with a few key differences.
Key features of an FSA:
- Contributions reduce your taxable income
- Withdrawals for qualified expenses are tax-free
- Funds must generally be used by year-end (use-it-or-lose-it rule)
- Not available to self-employed individuals
- Employers may allow a small rollover or grace period
FSAs are more restrictive than HSAs but can still significantly reduce your tax liability if used properly.
Contribution Limits for 2025
The IRS sets annual contribution limits for both accounts. For tax year 2025, the limits are:
HSA Contribution Limits
- Self-only coverage: $4,150
- Family coverage: $8,300
- Catch-up contribution (age 55+): Additional $1,000
FSA Contribution Limits
- Health FSA: $3,200 per employee
- Dependent Care FSA: Up to $5,000 per household ($2,500 if married filing separately)
HSA contributions can be made until the tax filing deadline, while FSA contributions must be made through your employer’s payroll system during open enrollment or a qualifying life event.
How HSAs and FSAs Cut Your Taxes
Contributions to HSAs and FSAs are made with pre-tax dollars, which means:
- Your taxable income is reduced
- You pay less in federal income tax, Social Security tax, and Medicare tax
- Your take-home pay increases—even if your gross income remains the same
Example: If you contribute $3,000 to an HSA and you’re in the 22% tax bracket, you could save around $660 in federal income taxes alone—plus additional savings on payroll taxes if contributed via payroll deduction.
How to Use HSA/FSA Funds for Qualified Expenses
Both HSA and FSA funds can be used for a wide range of qualified medical expenses under IRS Publication 502, including:
- Doctor visits, co-pays, and prescriptions
- Dental treatments (cleanings, fillings, braces)
- Vision care (exams, glasses, contacts, LASIK)
- Chiropractic and acupuncture services
- Mental health counseling
- Medical equipment (crutches, blood pressure monitors)
- Feminine hygiene products and over-the-counter medicines
Always keep your receipts and documentation in case of an IRS audit or employer substantiation request.
Strategic Tips to Maximize Refunds Using HSAs and FSAs
1. Max Out Contributions Early in the Year
Contributing early allows you to benefit from tax savings sooner and ensures you reach the annual limit by year-end. For HSAs, this also gives more time for investments to grow tax-free.
2. Combine HSA Contributions with Itemized Deductions
Even if you don’t itemize, HSA contributions lower your AGI. But if you do itemize and exceed the 7.5% AGI threshold for medical deductions, HSA-eligible expenses not paid with HSA funds can be included as itemized deductions.
3. Avoid Over-Contributing
Contributing beyond the IRS limits results in a 6% excise penalty on the excess amount. Track your contributions to ensure compliance.
4. Use Your HSA Like a Retirement Account
You don’t need to withdraw funds in the same year expenses are incurred. You can save receipts and reimburse yourself years later—allowing your HSA to grow tax-deferred and even invested like a 401(k).
5. Use FSA Funds Before Year-End
FSAs have strict rules: generally, you must use funds by the end of the plan year. Some plans allow a $640 rollover or a 2.5-month grace period. Plan expenses accordingly to avoid forfeiting unused funds.
6. Use Dependent Care FSA for Childcare Savings
Many parents overlook this powerful tool. A Dependent Care FSA can be used to pay for daycare, preschool, before/after-school programs, and summer camps. These contributions are pre-tax and can reduce your household tax liability significantly.
How to Report HSA and FSA Activity on Your Tax Return
HSA Reporting
- Form 8889: Used to report HSA contributions, distributions, and determine eligibility
- Form 1099-SA: Shows HSA distributions—sent by your HSA custodian
- Form 5498-SA: Reports contributions—used for informational purposes
Contributions made outside of payroll should be reported as an adjustment to income on Schedule 1 of Form 1040.
FSA Reporting
FSA contributions are typically deducted from your paycheck and reflected on your W-2 in Box 10 (for dependent care FSAs). No separate tax forms are required for a health FSA, but you should retain all receipts.
Can You Have Both an HSA and FSA?
Yes, but with limitations. You generally cannot have both a full Health FSA and an HSA unless your FSA is a Limited Purpose FSA—restricted to dental and vision expenses only. This combination allows you to maximize pre-tax savings while maintaining HSA eligibility.
Common Mistakes to Avoid
- Using FSA funds after the expiration date without confirmation of rollover/grace period
- Over-contributing to an HSA and not withdrawing the excess in time
- Failing to keep receipts or documentation for HSA/FSA spending
- Misunderstanding what expenses are “qualified”—always check IRS guidelines
- Not reviewing plan options during open enrollment and missing the opportunity to enroll
Final Thoughts
Both Health Savings Accounts and Flexible Spending Accounts offer valuable tax advantages that can directly reduce your taxable income and increase your refund. By understanding the rules, contribution limits, and eligible expenses, you can make the most of these accounts year after year. Whether you’re a young professional, a parent, or nearing retirement, HSAs and FSAs are excellent tools for managing health care costs and improving your overall financial strategy. Take advantage of open enrollment periods, plan your contributions wisely, and use these accounts strategically to keep more of your hard-earned money.
