When it comes to managing healthcare costs and reducing taxable income, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are two powerful tools available to many taxpayers. Both allow individuals to use pre-tax dollars to cover eligible medical expenses. However, a common point of confusion is how contributions and expenses related to HSAs and FSAs interact with the medical expense deduction on Schedule A of your federal tax return. This blog explores in detail how HSAs and FSAs affect your ability to claim medical deductions, and how to use them strategically to optimize your tax situation.
Understanding the Medical Expense Deduction
The IRS allows taxpayers who itemize deductions to deduct qualified, unreimbursed medical and dental expenses that exceed 7.5% of their Adjusted Gross Income (AGI). Only expenses above this threshold are deductible, and only if you choose to itemize deductions instead of taking the standard deduction.
For example, if your AGI is $80,000, only medical expenses that exceed $6,000 (7.5% of AGI) can be deducted. If your qualifying expenses total $9,000, the deductible portion would be $3,000.
What Is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP). HSAs offer a triple tax advantage:
- Contributions are tax-deductible (or pre-tax if made via payroll)
- Earnings grow tax-free
- Withdrawals are tax-free when used for qualified medical expenses
For 2025, HSA contribution limits are:
- $4,150 for individuals
- $8,300 for families
- Additional $1,000 catch-up contribution for individuals age 55 or older
What Is an FSA?
A Flexible Spending Account (FSA) is an employer-sponsored account that allows employees to contribute pre-tax dollars to pay for eligible medical expenses. Unlike HSAs, FSAs are typically “use-it-or-lose-it,” meaning funds must be used within the plan year or grace period.
For 2025, the FSA contribution limit is:
- $3,200 per employee (may vary by employer)
FSAs are available regardless of whether you have an HDHP. Some employers may also offer dependent care FSAs, which function differently and are not related to medical deductions.
How HSA and FSA Payments Affect the Medical Expense Deduction
Medical expenses paid using HSA or FSA funds cannot also be claimed as itemized deductions on Schedule A. That’s because the money used from an HSA or FSA is already pre-tax. Deducting the same expense again would amount to “double-dipping,” which is not allowed under IRS rules.
Example: You pay a $2,000 surgery bill using your HSA debit card. Since that $2,000 was paid with pre-tax dollars, you cannot include it when calculating your deductible medical expenses on Schedule A.
Only expenses paid with after-tax dollars are eligible for the Schedule A deduction. If you paid for an expense out-of-pocket, without using your HSA or FSA, and it was not reimbursed, then it may be deductible — if your total qualified expenses exceed 7.5% of AGI and you itemize.
What Happens If You Reimburse Yourself Later from Your HSA?
One benefit of an HSA is that you can reimburse yourself in the future for qualified expenses, as long as the expense was incurred after the HSA was established. If you pay out-of-pocket and plan to reimburse yourself later:
- You can include the expense as part of your Schedule A medical deduction if you itemize this year
- However, once you reimburse yourself from the HSA in a future year, you must remove that expense from the prior year’s deductions if you amend your return, or simply not count it as a new deduction
This can create complications, so careful recordkeeping is essential if you plan to time your HSA reimbursements strategically.
When It Makes Sense to Use HSA or FSA vs. Claiming a Deduction
If you qualify for both an HSA/FSA and the itemized deduction, you may be unsure which strategy is better. Here’s a comparison of each:
| Feature | HSA/FSA | Schedule A Medical Deduction |
|---|---|---|
| Tax savings | Immediate pre-tax benefit | Only kicks in after 7.5% of AGI |
| Eligibility | HSA: Requires HDHP; FSA: Offered by employer | Must itemize deductions |
| Carryover | HSA: Yes, unlimited FSA: Usually limited or none |
No carryover; applies only to the tax year paid |
| Flexibility in timing | HSA: Can reimburse years later | Only expenses paid within the tax year count |
Key Takeaway: HSAs and FSAs typically offer more flexibility and upfront tax benefits compared to the limited medical deduction. In most cases, using HSA/FSA funds is preferable to relying solely on Schedule A — unless you have unusually high expenses in a given year.
Can You Combine Strategies?
Yes — you can combine HSA/FSA usage with the Schedule A deduction, but you must ensure that you’re not claiming the same expense twice. Use HSA or FSA funds for part of your medical expenses and pay the rest out-of-pocket. If your unreimbursed out-of-pocket medical expenses exceed 7.5% of your AGI, you may still be eligible to deduct that excess.
Example: Your total medical expenses are $15,000. You pay $4,000 using your FSA, and $11,000 out-of-pocket. If your AGI is $100,000, then expenses above $7,500 may be deducted. You may deduct $3,500 ($11,000 – $7,500) on Schedule A.
Recordkeeping Requirements
Whether using an HSA, FSA, or itemized deduction, documentation is essential. Keep the following records:
- Receipts and invoices for each expense
- Proof of payment (credit card, bank statement)
- FSA/HSA withdrawal or reimbursement records
- Mileage logs for medical travel (if applicable)
- Prescription documentation for required over-the-counter items
Good records not only ensure accuracy but also protect you in the event of an IRS audit.
Tips for Maximizing Tax Savings
- Contribute the maximum allowed to your HSA or FSA each year to reduce taxable income
- Use HSA/FSA funds first for predictable or recurring expenses
- Consider paying high-cost medical bills with after-tax dollars if you’re close to the 7.5% AGI threshold
- Time elective procedures or payments to optimize deductions in high-expense years
- If possible, reserve HSA funds for future years and use out-of-pocket payments now to increase potential deductions
Conclusion: Understanding the Balance Between Tax-Advantaged Accounts and Itemized Deductions
HSAs and FSAs provide immediate tax relief by allowing you to use pre-tax dollars to cover eligible medical expenses. However, once an expense is paid through one of these accounts, it cannot be counted again for the itemized medical expense deduction. If you’re close to or above the 7.5% AGI threshold, you may benefit more from paying additional medical costs out-of-pocket to increase your Schedule A deduction.
Ultimately, the best approach depends on your income level, healthcare costs, and whether you’re itemizing deductions. Consider working with a tax advisor to find the right balance and to ensure you’re not missing valuable tax-saving opportunities while complying with IRS rules.
