“Hurry, hurry, hurry! There are only a few more saving days until 2025 is over! Don’t miss this opportunity to save tax-deferred dollars and keep the IRS from going deeper into your pocket. Time is running out and come December 31st this opportunity will be GONE, GONE, GONE. So, act now!”

 

Okay, so that may be a little too dramatic, but it is the truth. This late in the year there are not many tax deductions available that you can still take advantage of. But if you are eligible for one, consider the health savings account (HSA).

 

What is a Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged savings account for paying qualified medical expenses, which can only be opened by individuals enrolled in a high-deductible health plan (HDHP). Contributions to an HSA are tax-deductible, the money grows tax-free, and withdrawals for qualified medical costs are also tax-free. Unlike a Flexible Spending Account (FSA), HSA funds roll over year-to-year and are not “use it or lose it”.

 

HSA eligibility

To contribute to an HSA, you must be enrolled in an HSA-eligible health plan. For 2025, this means:

  • The plan has an annual deductible of at least $1,650 for self-only coverage and $3,300 for family coverage.
  • The out-of-pocket maximum, including annual deductible, does not exceed $8,300 for self-only coverage and $16,600 for family coverage

 

To contribute to an HSA you:

  • Cannot be enrolled in a health plan that is not an HSA-eligible plan
  • Cannot have a full-purpose health care flexible spending account (FSA)
  • Cannot be enrolled in Medicare
  • Cannot be claimed as a dependent on someone else’s tax return

 

Maximum contributions for 2025

  • $4,300 for self-only coverage
  • $8,550 for family coverage
  • $1,000 catch-up contribution for people 55 and older

 

HSA contribution deadline

Generally, you have until the tax filing deadline to contribute to an HSA. Most tax years, the deadline is on or around April 15.

 

Partial year enrollment

If you aren’t enrolled in an HSA-eligible health plan for the full year, you may only be able to contribute a portion of the allowable amount. However, if you’re covered on December 1, you may be able to contribute the maximum amount allowed.

 

Prorated contributions

  • Calculate the number of months you were enrolled in an HSA-eligible health plan on the first day of a month.
  • Divide by 12.
  • Multiply that number by the total amount you could contribute if you were eligible the whole year.

 

If you are enrolled in an HSA-eligible health plan as of December 1, you can contribute the maximum amount you’re eligible for under the IRS “last-month rule.” But there is a catch.

 

You have to stay enrolled in an HSA-eligible health plan for a one-year “testing period” running from December 1 of the year you contribute to December 31 of the next year. If you are no longer enrolled in an HSA-eligible health plan during that year, you have to pay income taxes and a 10% penalty on any excess contributions you made when you file your tax return.

 

HSA tax penalties

While HSAs offer great tax benefits, there are also tax penalties if you contribute too much during the year or use the money for ineligible expenses.

 

If you exceed the annual maximum contribution limit, you pay a 6% excise tax on your excess contributions in the year you overcontributed and in each year you fail to remove the excess contribution and its earnings. The excess contribution is also considered taxable income. If you correct the error before the tax filing deadline, you may be able to avoid income tax and the excise tax for that year.

 

If you use HSA dollars for ineligible expenses, you’ll get hit with a steep tax penalty.

  • For people under the age of 65, you’ll have to pay a 20% penalty plus any applicable income taxes on what you withdraw.
  • If you’re 65 or older, you can use HSA money for ineligible expenses penalty free, but you’ll have to pay income taxes on that amount.

 

 

Disclaimer:

This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors; all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investments at 1-888-777-0970 or email us at info@alhambrapartners.com.