How to save on healthcare and cut your taxable income with an HSA

Save on healthcare with HSA:

1. Health Savings Accounts (HSAs) let you reserve income for health-related expenses. Those funds are deducted from your taxable income. So money you’d otherwise pay in taxes stays in your pocket. $100 pre-tax = $100 to spend and save on healthcare expenses!
2. You don’t have to use the funds to get the tax benefits—you just have to deposit them! So if you want to reduce your taxable income as much as possible, deposit funds up to the allowable limit before time runs out!
3. The IRS determines what goods and services qualify as medical expenses. You can purchase some directly without obtaining specific documentation. With others, you need a Letter of Medical Necessity justifying their use for medical purposes.

The turn of the year can be a stressful time for personal finances. We’re spending so much on holiday revelry while renewing health insurance and budgeting for a new year!

But it’s also an excellent time to take advantage of Health Savings Accounts (HSAs), which help us save on medical expenses and cut down on our taxable income.

Here, we’ll review some HSA basics. Then dig into how to maximize end-of-year savings.

What are Health Savings Accounts (HSAs)?

HSAs are powerful accounts that help you save on healthcare costs while reducing your taxable income.

The funds you deposit into and use from these accounts are not subject to income tax. So you save the percentage of your income that you’d otherwise pay in taxes. Think of it like this: If you have $100, you may end up with $60-$80 after paying taxes on it. But $100 untaxed equals $100 to spend!

HSAs aren’t available to everyone—you have to have a high deductible health plan (HDHP) to qualify. If you get your insurance through your job, you may be offered an employer-sponsored HSA where a portion of your payroll funds can be deposited monthly. If you purchase a private HDHP through the public Marketplace, you can open an HSA from many banks and savings unions.

Learn more about how to open an HSA—and what to look for regarding interest rates and investment opportunities—in this Dr. B article.

What can you buy with HSA funds?

You can use HSA funds to pay for services and items that prevent or help treat an injury, disability or medical condition.

The IRS determines which specific items qualify as medical expenses. But items generally include things like health insurance premiums, doctor copays or office fees, eye exams, blood work costs, dental treatments, and surgery costs.

Then, there are lesser-known items and services.

These include (but are not limited to):

• Birth control pills, patches, etc.
• Menstrual products
• Over-the-counter cold and flu medications
• Covid-19 tests, hand sanitizer, masks, air purification systems, etc.
• Pregnancy tests, fertility procedures, and vasectomies
• Acupuncture and chiropractic services
• Alcoholism and drug addiction treatment services 
• Crutches, walkers, wheelchairs and other ambulatory devices
• Weight loss programs and medications
• Psychology, psychiatry or therapy sessions

To stay compliant with the IRS, save the receipts of items you’ve purchased with HSA funds. And make sure to audit items for eligibility before making your purchase. Many HSA providers offer a comprehensive list of qualifying items. Some even let you scan barcodes or search for items within an app to verify.

Get more details at What can you buy with HSA funds? by Dr. B.

When do you need a Letter of Medical Necessity (LMN)?

A Letter of Medical Necessity (or medical justification letter) is a document a doctor writes explaining why one such specific item or service is medically necessary for their patient.

Some goods and services can benefit the general health of one person and the medical needs of another person—and only the latter can use HSA funds to pay for them. By clarifying that the item or service is being used for medical reasons, a Letter of Medical Necessity allows the patient to pay for it with their HSA funds.

For example, most of us enjoy a good deep-tissue massage. But when a massage eases symptoms for someone with fibromyalgia or migraines, the cost of a massage becomes a medical expense.

Some HSA administrators require patients to submit a Letter of Medical Necessity before they will reimburse a paid purchase with HSA funds. If a patient were to directly pay for the massage with HSA funds and get audited by the IRS, the Letter of Medical Necessity serves as proof that the use of funds was justified. Otherwise, they would have to pay the cost back, plus penalty fees!

To learn more and find out how to get a Letter of Medical Necessity online, read this Dr. B article.

Can you use HSA for gym membership?

Exercise benefits general health and wellness—so it doesn’t automatically qualify as an HSA-eligible expense. It can qualify if exercise prevents or treats a medical condition like chronic pain, high BMI, or high cholesterol.

But in order to verify the cost with your HSA administrator or the IRS, you do need the qualification confirmed in a Letter of Medical Necessity.

Fortunately, Dr. B helps patients skip the waiting room and connect with a provider via a $15 online consultation. If you qualify, you’ll receive a Letter of Medical Necessity within 3 working hours.

How to maximize end-of-year savings

In 2025, individuals can deposit up to $4,300 into their HSA, and families can deposit up to $8,550. (Those 55+ not enrolled in Medicare can deposit an extra $1000.) And you can keep making deposits up to that limit until the end of the tax year, which is usually April 15th in the coming year!

That makes the turn of the new year an excellent time to move unused income into your HSA. As an individual, you could save $800-$1700 come tax time, depending on your tax bracket!

If you have unused funds in your account and don’t expect to have many health expenses in the new year, it’s also a good time to consider investment opportunities. Review the possibilities offered by your HSA administrator and consider if rolling some funds into stock options is the right move for you.

HSA FAQs:

Q: Is a Health Savings Account (HSA) the same as a Flexible Spending Account (FSA)?

A: No, HSAs and FSAs are different types of accounts, though they both offer pre-tax savings on funds reserved for medical expenses. Anyone with a high deductible health plan can open an HSA, and those funds roll over from one year to the next. FSAs are only available when offered by employers to employees as a benefits plan. They have separate deposit limits, and funds do not roll over in entirety from one year to the next. Learn more about their differences in this Dr. B article.

Q: Are HSA funds portable if you change jobs or health plans?

A: Yes, you get to keep all deposited funds if you change jobs or health plans. If your new plan is a high deductible health plan (HDHP), you can continue depositing into your current HSA. If your new employer works with a financial institution that offers HSAs, you can transfer your funds into a new HSA or open a second HSA with that institution. And if your new plan is not an HDHP, you can still pay for health costs with your HSA funds. You just can’t deposit any new income into the account!

Q: What happens if you don’t use HSA funds?

A: They accumulate! Some financial institutions offer interest rates or investment opportunities for HSA accounts. Otherwise, the funds sit as they would in any other savings account!

Q: What do you need to stay compliant with the IRS? Are there any forms to file come tax time?

A: During the year, it’s vital to save receipts for items you’ve purchased with your HSA, and any Letters of Medical Necessity you’ve acquired to justify medical services or goods. Come tax time, you’ll need to file form 8889. This form details the contributions you’ve made outside of payroll and confirms that funds spent were only for medical expenses.

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