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1040 ez taxes 15. 1040 ez taxes   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. 1040 ez taxes More information. 1040 ez taxes Special SituationsException for sales to related persons. 1040 ez taxes Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. 1040 ez taxes  If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. 1040 ez taxes See Mortgage ending early under Points in chapter 23. 1040 ez taxes Introduction This chapter explains the tax rules that apply when you sell your main home. 1040 ez taxes In most cases, your main home is the one in which you live most of the time. 1040 ez taxes If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). 1040 ez taxes See Excluding the Gain , later. 1040 ez taxes Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. 1040 ez taxes If you have gain that cannot be excluded, it is taxable. 1040 ez taxes Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). 1040 ez taxes You may also have to complete Form 4797, Sales of Business Property. 1040 ez taxes See Reporting the Sale , later. 1040 ez taxes If you have a loss on the sale, you generally cannot deduct it on your return. 1040 ez taxes However, you may need to report it. 1040 ez taxes See Reporting the Sale , later. 1040 ez taxes The following are main topics in this chapter. 1040 ez taxes Figuring gain or loss. 1040 ez taxes Basis. 1040 ez taxes Excluding the gain. 1040 ez taxes Ownership and use tests. 1040 ez taxes Reporting the sale. 1040 ez taxes Other topics include the following. 1040 ez taxes Business use or rental of home. 1040 ez taxes Recapturing a federal mortgage subsidy. 1040 ez taxes Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. 1040 ez taxes ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. 1040 ez taxes To exclude gain under the rules of this chapter, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. 1040 ez taxes Land. 1040 ez taxes   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. 1040 ez taxes However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. 1040 ez taxes See Vacant land under Main Home in Publication 523 for more information. 1040 ez taxes Example. 1040 ez taxes You buy a piece of land and move your main home to it. 1040 ez taxes Then you sell the land on which your main home was located. 1040 ez taxes This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. 1040 ez taxes More than one home. 1040 ez taxes   If you have more than one home, you can exclude gain only from the sale of your main home. 1040 ez taxes You must include in income gain from the sale of any other home. 1040 ez taxes If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year. 1040 ez taxes Example 1. 1040 ez taxes You own two homes, one in New York and one in Florida. 1040 ez taxes From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. 1040 ez taxes In the absence of facts and circumstances indicating otherwise, the New York home is your main home. 1040 ez taxes You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. 1040 ez taxes Example 2. 1040 ez taxes You own a house, but you live in another house that you rent. 1040 ez taxes The rented house is your main home. 1040 ez taxes Example 3. 1040 ez taxes You own two homes, one in Virginia and one in New Hampshire. 1040 ez taxes In 2009 and 2010, you lived in the Virginia home. 1040 ez taxes In 2011 and 2012, you lived in the New Hampshire home. 1040 ez taxes In 2013, you lived again in the Virginia home. 1040 ez taxes Your main home in 2009, 2010, and 2013 is the Virginia home. 1040 ez taxes Your main home in 2011 and 2012 is the New Hampshire home. 1040 ez taxes You would be eligible to exclude gain from the sale of either home (but not both) in 2013. 1040 ez taxes Property used partly as your main home. 1040 ez taxes   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. 1040 ez taxes For details, see Business Use or Rental of Home , later. 1040 ez taxes Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. 1040 ez taxes Subtract the adjusted basis from the amount realized to get your gain or loss. 1040 ez taxes     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. 1040 ez taxes It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. 1040 ez taxes Payment by employer. 1040 ez taxes   You may have to sell your home because of a job transfer. 1040 ez taxes If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. 1040 ez taxes Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7. 1040 ez taxes Option to buy. 1040 ez taxes   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. 1040 ez taxes If the option is not exercised, you must report the amount as ordinary income in the year the option expires. 1040 ez taxes Report this amount on Form 1040, line 21. 1040 ez taxes Form 1099-S. 1040 ez taxes   If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home. 1040 ez taxes   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. 1040 ez taxes Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. 1040 ez taxes Amount Realized The amount realized is the selling price minus selling expenses. 1040 ez taxes Selling expenses. 1040 ez taxes   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. 1040 ez taxes ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. 1040 ez taxes This adjusted basis must be determined before you can figure gain or loss on the sale of your home. 1040 ez taxes For information on how to figure your home's adjusted basis, see Determining Basis , later. 1040 ez taxes Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. 1040 ez taxes Gain on sale. 1040 ez taxes   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. 1040 ez taxes Loss on sale. 1040 ez taxes   If the amount realized is less than the adjusted basis, the difference is a loss. 1040 ez taxes A loss on the sale of your main home cannot be deducted. 1040 ez taxes Jointly owned home. 1040 ez taxes   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. 1040 ez taxes Separate returns. 1040 ez taxes   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. 1040 ez taxes Your ownership interest is generally determined by state law. 1040 ez taxes Joint owners not married. 1040 ez taxes   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. 1040 ez taxes Each of you applies the rules discussed in this chapter on an individual basis. 1040 ez taxes Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. 1040 ez taxes Foreclosure or repossession. 1040 ez taxes   If your home was foreclosed on or repossessed, you have a disposition. 1040 ez taxes See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. 1040 ez taxes Abandonment. 1040 ez taxes   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. 1040 ez taxes Trading (exchanging) homes. 1040 ez taxes   If you trade your old home for another home, treat the trade as a sale and a purchase. 1040 ez taxes Example. 1040 ez taxes You owned and lived in a home with an adjusted basis of $41,000. 1040 ez taxes A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. 1040 ez taxes This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). 1040 ez taxes If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). 1040 ez taxes Transfer to spouse. 1040 ez taxes   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. 1040 ez taxes This is true even if you receive cash or other consideration for the home. 1040 ez taxes As a result, the rules in this chapter do not apply. 1040 ez taxes More information. 1040 ez taxes   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. 1040 ez taxes Involuntary conversion. 1040 ez taxes   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. 1040 ez taxes This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations . 1040 ez taxes Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. 1040 ez taxes Your basis in your home is determined by how you got the home. 1040 ez taxes Generally, your basis is its cost if you bought it or built it. 1040 ez taxes If you got it in some other way (inheritance, gift, etc. 1040 ez taxes ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. 1040 ez taxes While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. 1040 ez taxes The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. 1040 ez taxes See Adjusted Basis , later. 1040 ez taxes You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. 1040 ez taxes Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. 1040 ez taxes Purchase. 1040 ez taxes   If you bought your home, your basis is its cost to you. 1040 ez taxes This includes the purchase price and certain settlement or closing costs. 1040 ez taxes In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. 1040 ez taxes If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. 1040 ez taxes Settlement fees or closing costs. 1040 ez taxes   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. 1040 ez taxes You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. 1040 ez taxes A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). 1040 ez taxes    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. 1040 ez taxes It also lists some settlement costs that cannot be included in basis. 1040 ez taxes   Also see Publication 523 for additional items and a discussion of basis other than cost. 1040 ez taxes Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. 1040 ez taxes To figure your adjusted basis, you can use Worksheet 1 in Publication 523. 1040 ez taxes Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. 1040 ez taxes Increases to basis. 1040 ez taxes   These include the following. 1040 ez taxes Additions and other improvements that have a useful life of more than 1 year. 1040 ez taxes Special assessments for local improvements. 1040 ez taxes Amounts you spent after a casualty to restore damaged property. 1040 ez taxes Improvements. 1040 ez taxes   These add to the value of your home, prolong its useful life, or adapt it to new uses. 1040 ez taxes You add the cost of additions and other improvements to the basis of your property. 1040 ez taxes   For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. 1040 ez taxes An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. 1040 ez taxes Repairs. 1040 ez taxes   These maintain your home in good condition but do not add to its value or prolong its life. 1040 ez taxes You do not add their cost to the basis of your property. 1040 ez taxes   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. 1040 ez taxes Decreases to basis. 1040 ez taxes   These include the following. 1040 ez taxes Discharge of qualified principal residence indebtedness that was excluded from income. 1040 ez taxes Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. 1040 ez taxes For details, see Publication 4681. 1040 ez taxes Gain you postponed from the sale of a previous home before May 7, 1997. 1040 ez taxes Deductible casualty losses. 1040 ez taxes Insurance payments you received or expect to receive for casualty losses. 1040 ez taxes Payments you received for granting an easement or right-of-way. 1040 ez taxes Depreciation allowed or allowable if you used your home for business or rental purposes. 1040 ez taxes Energy-related credits allowed for expenditures made on the residence. 1040 ez taxes (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. 1040 ez taxes ) Adoption credit you claimed for improvements added to the basis of your home. 1040 ez taxes Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. 1040 ez taxes Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. 1040 ez taxes An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. 1040 ez taxes District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). 1040 ez taxes General sales taxes (allowed beginning 2004 and ending before 2014) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. 1040 ez taxes Discharges of qualified principal residence indebtedness. 1040 ez taxes   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. 1040 ez taxes This exclusion applies to discharges made after 2006 and before 2014. 1040 ez taxes If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. 1040 ez taxes   File Form 982 with your tax return. 1040 ez taxes See the form's instructions for detailed information. 1040 ez taxes Recordkeeping. 1040 ez taxes You should keep records to prove your home's adjusted basis. 1040 ez taxes Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. 1040 ez taxes But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. 1040 ez taxes Keep records proving the basis of both homes as long as they are needed for tax purposes. 1040 ez taxes The records you should keep include: Proof of the home's purchase price and purchase expenses, Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis, Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain, Any Form 982 you filed to report any discharge of qualified principal residence indebtedness, Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997, and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. 1040 ez taxes Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. 1040 ez taxes This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. 1040 ez taxes To qualify, you must meet the ownership and use tests described later. 1040 ez taxes You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. 1040 ez taxes You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. 1040 ez taxes If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. 1040 ez taxes See Publication 505, Tax Withholding and Estimated Tax. 1040 ez taxes Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. 1040 ez taxes You meet the ownership test. 1040 ez taxes You meet the use test. 1040 ez taxes During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. 1040 ez taxes For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. 1040 ez taxes You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . 1040 ez taxes Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. 1040 ez taxes This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). 1040 ez taxes Exception. 1040 ez taxes   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. 1040 ez taxes However, the maximum amount you may be able to exclude will be reduced. 1040 ez taxes See Reduced Maximum Exclusion , later. 1040 ez taxes Example 1—home owned and occupied for at least 2 years. 1040 ez taxes Mya bought and moved into her main home in September 2011. 1040 ez taxes She sold the home at a gain in October 2013. 1040 ez taxes During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. 1040 ez taxes She meets the ownership and use tests. 1040 ez taxes Example 2—ownership test met but use test not met. 1040 ez taxes Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. 1040 ez taxes He later sold the home for a gain. 1040 ez taxes He owned the home during the entire 5-year period ending on the date of sale. 1040 ez taxes He meets the ownership test but not the use test. 1040 ez taxes He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). 1040 ez taxes Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. 1040 ez taxes You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. 1040 ez taxes Temporary absence. 1040 ez taxes   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. 1040 ez taxes The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. 1040 ez taxes Example 1. 1040 ez taxes David Johnson, who is single, bought and moved into his home on February 1, 2011. 1040 ez taxes Each year during 2011 and 2012, David left his home for a 2-month summer vacation. 1040 ez taxes David sold the house on March 1, 2013. 1040 ez taxes Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. 1040 ez taxes The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. 1040 ez taxes Example 2. 1040 ez taxes Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. 1040 ez taxes He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. 1040 ez taxes On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. 1040 ez taxes Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. 1040 ez taxes He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. 1040 ez taxes Ownership and use tests met at different times. 1040 ez taxes   You can meet the ownership and use tests during different 2-year periods. 1040 ez taxes However, you must meet both tests during the 5-year period ending on the date of the sale. 1040 ez taxes Example. 1040 ez taxes Beginning in 2002, Helen Jones lived in a rented apartment. 1040 ez taxes The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. 1040 ez taxes In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. 1040 ez taxes On July 12, 2013, while still living in her daughter's home, she sold her condominium. 1040 ez taxes Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. 1040 ez taxes She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). 1040 ez taxes She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). 1040 ez taxes The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. 1040 ez taxes Cooperative apartment. 1040 ez taxes   If you sold stock as a tenant-stockholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years. 1040 ez taxes Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. 1040 ez taxes Exception for individuals with a disability. 1040 ez taxes   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. 1040 ez taxes Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. 1040 ez taxes If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. 1040 ez taxes Previous home destroyed or condemned. 1040 ez taxes   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. 1040 ez taxes This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. 1040 ez taxes Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. 1040 ez taxes Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. 1040 ez taxes   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. 1040 ez taxes You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on "qualified official extended duty" or as an enrolled volunteer or volunteer leader of the Peace Corps. 1040 ez taxes This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. 1040 ez taxes   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. 1040 ez taxes For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. 1040 ez taxes Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. 1040 ez taxes (But see Special rules for joint returns , next. 1040 ez taxes ) Special rules for joint returns. 1040 ez taxes   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. 1040 ez taxes You are married and file a joint return for the year. 1040 ez taxes Either you or your spouse meets the ownership test. 1040 ez taxes Both you and your spouse meet the use test. 1040 ez taxes During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. 1040 ez taxes If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. 1040 ez taxes For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. 1040 ez taxes Example 1—one spouse sells a home. 1040 ez taxes Emily sells her home in June 2013 for a gain of $300,000. 1040 ez taxes She marries Jamie later in the year. 1040 ez taxes She meets the ownership and use tests, but Jamie does not. 1040 ez taxes Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. 1040 ez taxes The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. 1040 ez taxes Example 2—each spouse sells a home. 1040 ez taxes The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. 1040 ez taxes He meets the ownership and use tests on his home, but Emily does not. 1040 ez taxes Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. 1040 ez taxes However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. 1040 ez taxes Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. 1040 ez taxes The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. 1040 ez taxes Sale of main home by surviving spouse. 1040 ez taxes   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. 1040 ez taxes   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. 1040 ez taxes The sale or exchange took place after 2008. 1040 ez taxes The sale or exchange took place no more than 2 years after the date of death of your spouse. 1040 ez taxes You have not remarried. 1040 ez taxes You and your spouse met the use test at the time of your spouse's death. 1040 ez taxes You or your spouse met the ownership test at the time of your spouse's death. 1040 ez taxes Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. 1040 ez taxes Example. 1040 ez taxes   Harry owned and used a house as his main home since 2009. 1040 ez taxes Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. 1040 ez taxes Harry died on August 15, 2013, and Wilma inherited the property. 1040 ez taxes Wilma sold the property on September 3, 2013, at which time she had not remarried. 1040 ez taxes Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. 1040 ez taxes Home transferred from spouse. 1040 ez taxes   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. 1040 ez taxes Use of home after divorce. 1040 ez taxes   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. 1040 ez taxes Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. 1040 ez taxes This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. 1040 ez taxes In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. 1040 ez taxes A change in place of employment. 1040 ez taxes Health. 1040 ez taxes Unforeseen circumstances. 1040 ez taxes Unforeseen circumstances. 1040 ez taxes   The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. 1040 ez taxes   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. 1040 ez taxes Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. 1040 ez taxes But you must meet the ownership and use tests. 1040 ez taxes Periods of nonqualified use. 1040 ez taxes   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. 1040 ez taxes Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. 1040 ez taxes Exceptions. 1040 ez taxes   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. 1040 ez taxes The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. 1040 ez taxes Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. 1040 ez taxes Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. 1040 ez taxes Calculation. 1040 ez taxes   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:   Total nonqualified use during the period of ownership after 2008      Total period of ownership     This calculation can be found in Worksheet 2, line 10, in Publication 523. 1040 ez taxes Example 1. 1040 ez taxes On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. 1040 ez taxes She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. 1040 ez taxes The house was rented from June 1, 2009, to March 31, 2011. 1040 ez taxes Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. 1040 ez taxes Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. 1040 ez taxes During the 5-year period ending on the date of the sale (January 31, 2008-January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. 1040 ez taxes Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 1/31/13 22 months         38 months 22 months During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. 1040 ez taxes Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. 1040 ez taxes 321. 1040 ez taxes To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. 1040 ez taxes 321. 1040 ez taxes Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. 1040 ez taxes Example 2. 1040 ez taxes William owned and used a house as his main home from 2007 through 2010. 1040 ez taxes On January 1, 2011, he moved to another state. 1040 ez taxes He rented his house from that date until April 30, 2013, when he sold it. 1040 ez taxes During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. 1040 ez taxes He must report the sale on Form 4797 because it was rental property at the time of sale. 1040 ez taxes Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. 1040 ez taxes Because he met the ownership and use tests, he can exclude gain up to $250,000. 1040 ez taxes However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. 1040 ez taxes Depreciation after May 6, 1997. 1040 ez taxes   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. 1040 ez taxes If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. 1040 ez taxes See Publication 544 for more information. 1040 ez taxes Property used partly for business or rental. 1040 ez taxes   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. 1040 ez taxes Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. 1040 ez taxes If any of these conditions apply, report the entire gain or loss. 1040 ez taxes For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. 1040 ez taxes If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). 1040 ez taxes See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. 1040 ez taxes Installment sale. 1040 ez taxes    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. 1040 ez taxes These sales are called “installment sales. 1040 ez taxes ” If you finance the buyer's purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. 1040 ez taxes You may be able to report the part of the gain you cannot exclude on the installment basis. 1040 ez taxes    Use Form 6252, Installment Sale Income, to report the sale. 1040 ez taxes Enter your exclusion on line 15 of Form 6252. 1040 ez taxes Seller-financed mortgage. 1040 ez taxes   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. 1040 ez taxes You must separately report as interest income the interest you receive as part of each payment. 1040 ez taxes If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). 1040 ez taxes The buyer must give you his or her SSN, and you must give the buyer your SSN. 1040 ez taxes Failure to meet these requirements may result in a $50 penalty for each failure. 1040 ez taxes If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. 1040 ez taxes More information. 1040 ez taxes   For more information on installment sales, see Publication 537, Installment Sales. 1040 ez taxes Special Situations The situations that follow may affect your exclusion. 1040 ez taxes Sale of home acquired in a like-kind exchange. 1040 ez taxes   You cannot claim the exclusion if: You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange. 1040 ez taxes Gain from a like-kind exchange is not taxable at the time of the exchange. 1040 ez taxes This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. 1040 ez taxes To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. 1040 ez taxes For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. 1040 ez taxes Home relinquished in a like-kind exchange. 1040 ez taxes   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. 1040 ez taxes Expatriates. 1040 ez taxes   You cannot claim the exclusion if the expatriation tax applies to you. 1040 ez taxes The expatriation tax applies to certain U. 1040 ez taxes S. 1040 ez taxes citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). 1040 ez taxes For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. 1040 ez taxes S. 1040 ez taxes Tax Guide for Aliens. 1040 ez taxes Home destroyed or condemned. 1040 ez taxes   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. 1040 ez taxes   Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in: Publication 547, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. 1040 ez taxes Sale of remainder interest. 1040 ez taxes   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. 1040 ez taxes If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately. 1040 ez taxes Exception for sales to related persons. 1040 ez taxes   You cannot exclude gain from the sale of a remainder interest in your home to a related person. 1040 ez taxes Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. 1040 ez taxes ), and lineal descendants (children, grandchildren, etc. 1040 ez taxes ). 1040 ez taxes Related persons also include certain corporations, partnerships, trusts, and exempt organizations. 1040 ez taxes Recapturing (Paying Back) a Federal Mortgage Subsidy If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. 1040 ez taxes You recapture the benefit by increasing your federal income tax for the year of the sale. 1040 ez taxes You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. 1040 ez taxes Loans subject to recapture rules. 1040 ez taxes   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. 1040 ez taxes The recapture also applies to assumptions of these loans. 1040 ez taxes When recapture applies. 1040 ez taxes   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. 1040 ez taxes You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. 1040 ez taxes Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program). 1040 ez taxes When recapture does not apply. 1040 ez taxes   Recapture does not apply in any of the following situations. 1040 ez taxes Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. 1040 ez taxes Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. 1040 ez taxes For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. 1040 ez taxes Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040 ez taxes The home is disposed of as a result of your death. 1040 ez taxes You dispose of the home more than 9 years after the date you closed your mortgage loan. 1040 ez taxes You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. 1040 ez taxes You dispose of the home at a loss. 1040 ez taxes Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. 1040 ez taxes The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. 1040 ez taxes For more information, see Replacement Period in Publication 547. 1040 ez taxes You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). 1040 ez taxes Notice of amounts. 1040 ez taxes   At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. 1040 ez taxes How to figure and report the recapture. 1040 ez taxes    The recapture tax is figured on Form 8828. 1040 ez taxes If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture tax. 1040 ez taxes Attach Form 8828 to your Form 1040. 1040 ez taxes For more information, see Form 8828 and its instructions. 1040 ez taxes Prev  Up  Next   Home   More Online Publications

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1040 ez taxes Publication 969 - Main Content Table of Contents Health Savings Accounts (HSAs)Qualifying for an HSA Contributions to an HSA Distributions From an HSA Balance in an HSA Death of HSA Holder Filing Form 8889 Employer Participation Medical Savings Accounts (MSAs)Archer MSAs Contributions to an MSA Distributions From an MSA Balance in an Archer MSA Death of the Archer MSA Holder Filing Form 8853 Employer Participation Medicare Advantage MSAs Flexible Spending Arrangements (FSAs)Qualifying for an FSA Contributions to an FSA Distributions From an FSA Balance in an FSA Employer Participation Health Reimbursement Arrangements (HRAs)Qualifying for an HRA Contributions to an HRA Distributions From an HRA Balance in an HRA Employer Participation How To Get Tax HelpLow Income Taxpayer Clinics Health Savings Accounts (HSAs) A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. 1040 ez taxes You must be an eligible individual to qualify for an HSA. 1040 ez taxes No permission or authorization from the IRS is necessary to establish an HSA. 1040 ez taxes You set up an HSA with a trustee. 1040 ez taxes A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. 1040 ez taxes The HSA can be established through a trustee that is different from your health plan provider. 1040 ez taxes Your employer may already have some information on HSA trustees in your area. 1040 ez taxes If you have an Archer MSA, you can generally roll it over into an HSA tax free. 1040 ez taxes See Rollovers, later. 1040 ez taxes What are the benefits of an HSA?   You may enjoy several benefits from having an HSA. 1040 ez taxes You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. 1040 ez taxes Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. 1040 ez taxes The contributions remain in your account until you use them. 1040 ez taxes The interest or other earnings on the assets in the account are tax free. 1040 ez taxes Distributions may be tax free if you pay qualified medical expenses. 1040 ez taxes See Qualified medical expenses , later. 1040 ez taxes An HSA is “portable. 1040 ez taxes ” It stays with you if you change employers or leave the work force. 1040 ez taxes Qualifying for an HSA To be an eligible individual and qualify for an HSA, you must meet the following requirements. 1040 ez taxes You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month. 1040 ez taxes You have no other health coverage except what is permitted under Other health coverage , later. 1040 ez taxes You are not enrolled in Medicare. 1040 ez taxes You cannot be claimed as a dependent on someone else's 2013 tax return. 1040 ez taxes Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). 1040 ez taxes If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you. 1040 ez taxes If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. 1040 ez taxes This is true even if the other person does not actually claim your exemption. 1040 ez taxes Each spouse who is an eligible individual who wants an HSA must open a separate HSA. 1040 ez taxes You cannot have a joint HSA. 1040 ez taxes High deductible health plan (HDHP). 1040 ez taxes   An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. 1040 ez taxes Out-of-pocket expenses include copayments and other amounts, but do not include premiums. 1040 ez taxes   An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. 1040 ez taxes Preventive care includes, but is not limited to, the following. 1040 ez taxes Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals. 1040 ez taxes Routine prenatal and well-child care. 1040 ez taxes Child and adult immunizations. 1040 ez taxes Tobacco cessation programs. 1040 ez taxes Obesity weight-loss programs. 1040 ez taxes Screening services. 1040 ez taxes This includes screening services for the following: Cancer. 1040 ez taxes Heart and vascular diseases. 1040 ez taxes Infectious diseases. 1040 ez taxes Mental health conditions. 1040 ez taxes Substance abuse. 1040 ez taxes Metabolic, nutritional, and endocrine conditions. 1040 ez taxes Musculoskeletal disorders. 1040 ez taxes Obstetric and gynecological conditions. 1040 ez taxes Pediatric conditions. 1040 ez taxes Vision and hearing disorders. 1040 ez taxes For more information on screening services, see Notice 2004-23, 2004-15 I. 1040 ez taxes R. 1040 ez taxes B. 1040 ez taxes 725 available at www. 1040 ez taxes irs. 1040 ez taxes gov/irb/2004-15_IRB/ar10. 1040 ez taxes html. 1040 ez taxes     The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2013. 1040 ez taxes      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,250 $12,500 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. 1040 ez taxes Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. 1040 ez taxes    The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2014. 1040 ez taxes      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,350 $12,700 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. 1040 ez taxes Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. 1040 ez taxes   Self-only HDHP coverage is an HDHP covering only an eligible individual. 1040 ez taxes Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual). 1040 ez taxes Example. 1040 ez taxes An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. 1040 ez taxes This is family HDHP coverage. 1040 ez taxes Family plans that do not meet the high deductible rules. 1040 ez taxes   There are some family plans that have deductibles for both the family as a whole and for individual family members. 1040 ez taxes Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. 1040 ez taxes If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. 1040 ez taxes Example. 1040 ez taxes You have family health insurance coverage in 2013. 1040 ez taxes The annual deductible for the family plan is $3,500. 1040 ez taxes This plan also has an individual deductible of $1,500 for each family member. 1040 ez taxes The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,500) for family coverage. 1040 ez taxes Other health coverage. 1040 ez taxes   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. 1040 ez taxes However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. 1040 ez taxes    You can have additional insurance that provides benefits only for the following items. 1040 ez taxes Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property. 1040 ez taxes A specific disease or illness. 1040 ez taxes A fixed amount per day (or other period) of hospitalization. 1040 ez taxes   You can also have coverage (whether provided through insurance or otherwise) for the following items. 1040 ez taxes Accidents. 1040 ez taxes Disability. 1040 ez taxes Dental care. 1040 ez taxes Vision care. 1040 ez taxes Long-term care. 1040 ez taxes    Plans in which substantially all of the coverage is through the items listed earlier are not HDHPs. 1040 ez taxes For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA. 1040 ez taxes Prescription drug plans. 1040 ez taxes   You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. 1040 ez taxes If you can receive benefits before that deductible is met, you are not an eligible individual. 1040 ez taxes Other employee health plans. 1040 ez taxes   An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. 1040 ez taxes Health FSAs and HRAs are discussed later. 1040 ez taxes   However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements. 1040 ez taxes Limited-purpose health FSA or HRA. 1040 ez taxes These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. 1040 ez taxes Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible. 1040 ez taxes Suspended HRA. 1040 ez taxes Before the beginning of an HRA coverage period, you can elect to suspend the HRA. 1040 ez taxes The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. 1040 ez taxes When the suspension period ends, you are no longer eligible to make contributions to an HSA. 1040 ez taxes Post-deductible health FSA or HRA. 1040 ez taxes These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. 1040 ez taxes The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met. 1040 ez taxes Retirement HRA. 1040 ez taxes This arrangement pays or reimburses only those medical expenses incurred after retirement. 1040 ez taxes After retirement you are no longer eligible to make contributions to an HSA. 1040 ez taxes Health FSA – grace period. 1040 ez taxes   Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero. 1040 ez taxes See Flexible Spending Arrangements (FSAs) , later. 1040 ez taxes Contributions to an HSA Any eligible individual can contribute to an HSA. 1040 ez taxes For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. 1040 ez taxes For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. 1040 ez taxes Family members or any other person may also make contributions on behalf of an eligible individual. 1040 ez taxes Contributions to an HSA must be made in cash. 1040 ez taxes Contributions of stock or property are not allowed. 1040 ez taxes Limit on Contributions The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. 1040 ez taxes For 2013, if you have self-only HDHP coverage, you can contribute up to $3,250. 1040 ez taxes If you have family HDHP coverage, you can contribute up to $6,450. 1040 ez taxes For 2014, if you have self-only HDHP coverage, you can contribute up to $3,300. 1040 ez taxes If you have family HDHP coverage you can contribute up to $6,550. 1040 ez taxes If you were, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and did not change your type of coverage, you can contribute the full amount based on your type of coverage. 1040 ez taxes However, if you were not an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of: The limitation shown on the Line 3 Limitation Chart and Worksheetin the Instructions for Form 8889, Health Savings Accounts (HSAs), or The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year. 1040 ez taxes If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2013 is $6,450 even if you changed coverage during the year. 1040 ez taxes Last-month rule. 1040 ez taxes   Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. 1040 ez taxes You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month. 1040 ez taxes Testing period. 1040 ez taxes   If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. 1040 ez taxes For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. 1040 ez taxes For example, December 1, 2013, through December 31, 2014. 1040 ez taxes   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. 1040 ez taxes You include this amount in your income in the year in which you fail to be an eligible individual. 1040 ez taxes This amount is also subject to a 10% additional tax. 1040 ez taxes The income and additional tax are shown on Form 8889, Part III. 1040 ez taxes Example 1. 1040 ez taxes Chris, age 53, becomes an eligible individual on December 1, 2013. 1040 ez taxes He has family HDHP coverage on that date. 1040 ez taxes Under the last-month rule, he contributes $6,450 to his HSA. 1040 ez taxes Chris fails to be an eligible individual in June 2014. 1040 ez taxes Because Chris did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), he must include in his 2014 income the contributions made in 2013 that would not have been made except for the last-month rule. 1040 ez taxes Chris uses the worksheet in the Form 8889 instructions to determine this amount. 1040 ez taxes January -0- February -0- March -0- April -0- May -0- June -0- July -0- August -0- September -0- October -0- November -0- December $6,450. 1040 ez taxes 00 Total for all months $6,450. 1040 ez taxes 00 Limitation. 1040 ez taxes Divide the total by 12 $537. 1040 ez taxes 50 Chris would include $5,912. 1040 ez taxes 50 ($6,450. 1040 ez taxes 00 – $537. 1040 ez taxes 50) in his gross income on his 2014 tax return. 1040 ez taxes Also, a 10% additional tax applies to this amount. 1040 ez taxes Example 2. 1040 ez taxes Erika, age 39, has self-only HDHP coverage on January 1, 2013. 1040 ez taxes Erika changes to family HDHP coverage on November 1, 2013. 1040 ez taxes Because Erika has family HDHP coverage on December 1, 2013, she contributes $6,450 for 2013. 1040 ez taxes Erika fails to be an eligible individual in March 2014. 1040 ez taxes Because she did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), she must include in income the contribution made that would not have been made except for the last-month rule. 1040 ez taxes Erika uses the worksheet in the Form 8889 instructions to determine this amount. 1040 ez taxes January $3,250. 1040 ez taxes 00 February $3,250. 1040 ez taxes 00 March $3,250. 1040 ez taxes 00 April $3,250. 1040 ez taxes 00 May $3,250. 1040 ez taxes 00 June $3,250. 1040 ez taxes 00 July $3,250. 1040 ez taxes 00 August $3,250. 1040 ez taxes 00 September $3,250. 1040 ez taxes 00 October $3,250. 1040 ez taxes 00 November $6,450. 1040 ez taxes 00 December $6,450. 1040 ez taxes 00 Total for all months $45,400. 1040 ez taxes 00 Limitation. 1040 ez taxes Divide the total by 12 $3,783. 1040 ez taxes 34 Erika would include $2,666. 1040 ez taxes 67 ($6,450 – $3,783. 1040 ez taxes 34) in her gross income on her 2014 tax return. 1040 ez taxes Also, a 10% additional tax applies to this amount. 1040 ez taxes Additional contribution. 1040 ez taxes   If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. 1040 ez taxes For example, if you have self-only coverage, you can contribute up to $4,250 (the contribution limit for self-only coverage ($3,250) plus the additional contribution of $1,000). 1040 ez taxes However, see Enrolled in Medicare , later. 1040 ez taxes If you have more than one HSA in 2013, your total contributions to all the HSAs cannot be more than the limits discussed earlier. 1040 ez taxes Reduction of contribution limit. 1040 ez taxes   You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. 1040 ez taxes A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. 1040 ez taxes Rules for married people. 1040 ez taxes   If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. 1040 ez taxes If each spouse has family coverage under a separate plan, the contribution limit for 2013 is $6,450. 1040 ez taxes You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouses' Archer MSAs. 1040 ez taxes After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division. 1040 ez taxes The rules for married people apply only if both spouses are eligible individuals. 1040 ez taxes If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. 1040 ez taxes If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,450. 1040 ez taxes Each spouse must make the additional contribution to his or her own HSA. 1040 ez taxes Example. 1040 ez taxes For 2013, Mr. 1040 ez taxes Auburn and his wife are both eligible individuals. 1040 ez taxes They each have family coverage under separate HDHPs. 1040 ez taxes Mr. 1040 ez taxes Auburn is 58 years old and Mrs. 1040 ez taxes Auburn is 53. 1040 ez taxes Mr. 1040 ez taxes and Mrs. 1040 ez taxes Auburn can split the family contribution limit ($6,450) equally or they can agree on a different division. 1040 ez taxes If they split it equally, Mr. 1040 ez taxes Auburn can contribute $4,225 to an HSA (one-half the maximum contribution for family coverage ($3,225) + $1,000 additional contribution) and Mrs. 1040 ez taxes Auburn can contribute $3,225 to an HSA. 1040 ez taxes Employer contributions. 1040 ez taxes   You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. 1040 ez taxes This includes amounts contributed to your account by your employer through a cafeteria plan. 1040 ez taxes Enrolled in Medicare. 1040 ez taxes   Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. 1040 ez taxes Example. 1040 ez taxes You turned age 65 in July 2013 and enrolled in Medicare. 1040 ez taxes You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. 1040 ez taxes Your contribution limit is $2,125 ($4,250 × 6 ÷ 12). 1040 ez taxes Qualified HSA funding distribution. 1040 ez taxes   A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. 1040 ez taxes This distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. 1040 ez taxes For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. 1040 ez taxes   The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. 1040 ez taxes The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. 1040 ez taxes The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. 1040 ez taxes The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. 1040 ez taxes   You can make only one qualified HSA funding distribution during your lifetime. 1040 ez taxes However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. 1040 ez taxes The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled. 1040 ez taxes Example. 1040 ez taxes In 2013, you are an eligible individual, age 57, with self-only HDHP coverage. 1040 ez taxes You can make a qualified HSA funding distribution of $4,250 ($3,250 plus $1,000 additional contribution). 1040 ez taxes Funding distribution – testing period. 1040 ez taxes   You must remain an eligible individual during the testing period. 1040 ez taxes For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. 1040 ez taxes For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2013, your testing period begins in August 2013, and ends on August 31, 2014. 1040 ez taxes   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. 1040 ez taxes You include this amount in income in the year in which you fail to be an eligible individual. 1040 ez taxes This amount is also subject to a 10% additional tax. 1040 ez taxes The income and the additional tax are shown on Form 8889, Part III. 1040 ez taxes   Each qualified HSA funding distribution allowed has its own testing period. 1040 ez taxes For example, you are an eligible individual, age 45, with self-only HDHP coverage. 1040 ez taxes On June 18, 2013, you make a qualified HSA funding distribution of $3,250. 1040 ez taxes On July 27, 2013, you enroll in family HDHP coverage and on August 17, 2013, you make a qualified HSA funding distribution of $3,200. 1040 ez taxes Your testing period for the first distribution begins in June 2013 and ends on June 30, 2014. 1040 ez taxes Your testing period for the second distribution begins in August 2013 and ends on August 31, 2014. 1040 ez taxes   The testing period rule that applies under the last-month rule (discussed earlier) does not apply to amounts contributed to an HSA through a qualified HSA funding distribution. 1040 ez taxes If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and will not be subject to the additional tax for failing to meet the last-month rule testing period. 1040 ez taxes Rollovers A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit. 1040 ez taxes Archer MSAs and other HSAs. 1040 ez taxes   You can roll over amounts from Archer MSAs and other HSAs into an HSA. 1040 ez taxes You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. 1040 ez taxes Rollover contributions do not need to be in cash. 1040 ez taxes Rollovers are not subject to the annual contribution limits. 1040 ez taxes   You must roll over the amount within 60 days after the date of receipt. 1040 ez taxes You can make only one rollover contribution to an HSA during a 1-year period. 1040 ez taxes Note. 1040 ez taxes If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer is not considered a rollover. 1040 ez taxes There is no limit on the number of these transfers. 1040 ez taxes Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889. 1040 ez taxes When To Contribute You can make contributions to your HSA for 2013 until April 15, 2014. 1040 ez taxes If you fail to be an eligible individual during 2013, you can still make contributions, up until April 15, 2014, for the months you were an eligible individual. 1040 ez taxes Your employer can make contributions to your HSA between January 1, 2014, and April 15, 2014, that are allocated to 2013. 1040 ez taxes Your employer must notify you and the trustee of your HSA that the contribution is for 2013. 1040 ez taxes The contribution will be reported on your 2014 Form W-2. 1040 ez taxes Reporting Contributions on Your Return Contributions made by your employer are not included in your income. 1040 ez taxes Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. 1040 ez taxes Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income. 1040 ez taxes Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. 1040 ez taxes The contributions are treated as a distribution of money and are not included in the partner's gross income. 1040 ez taxes Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. 1040 ez taxes In both situations, the partner can deduct the contribution made to the partner's HSA. 1040 ez taxes Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. 1040 ez taxes The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. 1040 ez taxes Form 8889. 1040 ez taxes   Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. 1040 ez taxes You should include all contributions made for 2013, including those made by April 15, 2014, that are designated for 2013. 1040 ez taxes Contributions made by your employer and qualified HSA funding distributions are also shown on the form. 1040 ez taxes   You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. 1040 ez taxes Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. 1040 ez taxes Follow the instructions for Form 8889. 1040 ez taxes Report your HSA deduction on Form 1040 or Form 1040NR. 1040 ez taxes Excess contributions. 1040 ez taxes   You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. 1040 ez taxes Excess contributions are not deductible. 1040 ez taxes Excess contributions made by your employer are included in your gross income. 1040 ez taxes If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. 1040 ez taxes   Generally, you must pay a 6% excise tax on excess contributions. 1040 ez taxes See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. 1040 ez taxes The excise tax applies to each tax year the excess contribution remains in the account. 1040 ez taxes   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. 1040 ez taxes You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. 1040 ez taxes You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. 1040 ez taxes If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. 1040 ez taxes If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later. 1040 ez taxes Deducting an excess contribution in a later year. 1040 ez taxes   You may be able to deduct excess contributions for previous years that are still in your HSA. 1040 ez taxes The excess contribution you can deduct for the current year is the lesser of the following two amounts. 1040 ez taxes Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. 1040 ez taxes The total excess contributions in your HSA at the beginning of the year. 1040 ez taxes   Amounts contributed for the year include contributions by you, your employer, and any other person. 1040 ez taxes They also include any qualified HSA funding distribution made to your HSA. 1040 ez taxes Any excess contribution remaining at the end of a tax year is subject to the excise tax. 1040 ez taxes See Form 5329. 1040 ez taxes Distributions From an HSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. 1040 ez taxes When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA. 1040 ez taxes You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. 1040 ez taxes If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. 1040 ez taxes You do not have to make distributions from your HSA each year. 1040 ez taxes If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. 1040 ez taxes Generally, a distribution is money you get from your health savings account. 1040 ez taxes Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. 1040 ez taxes The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. 1040 ez taxes Qualified medical expenses. 1040 ez taxes   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. 1040 ez taxes These are explained in Publication 502, Medical and Dental Expenses. 1040 ez taxes   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for HSA purposes. 1040 ez taxes A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. 1040 ez taxes   For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. 1040 ez taxes State law determines when an HSA is established. 1040 ez taxes An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established. 1040 ez taxes   If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses. 1040 ez taxes   Qualified medical expenses are those incurred by the following persons. 1040 ez taxes You and your spouse. 1040 ez taxes All dependents you claim on your tax return. 1040 ez taxes Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. 1040 ez taxes    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. 1040 ez taxes You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA. 1040 ez taxes Insurance premiums. 1040 ez taxes   You cannot treat insurance premiums as qualified medical expenses unless the premiums are for: Long-term care insurance. 1040 ez taxes Health care continuation coverage (such as coverage under COBRA). 1040 ez taxes Health care coverage while receiving unemployment compensation under federal or state law. 1040 ez taxes Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap). 1040 ez taxes   The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. 1040 ez taxes See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040). 1040 ez taxes   Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. 1040 ez taxes For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses. 1040 ez taxes Health coverage tax credit. 1040 ez taxes   You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. 1040 ez taxes See Publication 502 for more information on this credit. 1040 ez taxes Deemed distributions from HSAs. 1040 ez taxes   The following situations result in deemed taxable distributions from your HSA. 1040 ez taxes You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2013. 1040 ez taxes Your account ceases to be an HSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8889. 1040 ez taxes You used any portion of any of your HSAs as security for a loan at any time in 2013. 1040 ez taxes You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. 1040 ez taxes   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the HSA, Lending of money between you and the HSA, Furnishing goods, services, or facilities between you and the HSA, and Transfer to or use by you, or for your benefit, of any assets of the HSA. 1040 ez taxes   Any deemed distribution will not be treated as used to pay qualified medical expenses. 1040 ez taxes These distributions are included in your income and are subject to the additional 20% tax, discussed later. 1040 ez taxes Recordkeeping. 1040 ez taxes You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. 1040 ez taxes Do not send these records with your tax return. 1040 ez taxes Keep them with your tax records. 1040 ez taxes Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). 1040 ez taxes If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. 1040 ez taxes However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. 1040 ez taxes Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. 1040 ez taxes If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. 1040 ez taxes Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. 1040 ez taxes You may have to pay an additional 20% tax on your taxable distribution. 1040 ez taxes HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA. 1040 ez taxes Additional tax. 1040 ez taxes   There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. 1040 ez taxes Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. 1040 ez taxes Exceptions. 1040 ez taxes   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. 1040 ez taxes Balance in an HSA An HSA is generally exempt from tax. 1040 ez taxes You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. 1040 ez taxes Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). 1040 ez taxes Earnings on amounts in an HSA are not included in your income while held in the HSA. 1040 ez taxes Death of HSA Holder You should choose a beneficiary when you set up your HSA. 1040 ez taxes What happens to that HSA when you die depends on whom you designate as the beneficiary. 1040 ez taxes Spouse is the designated beneficiary. 1040 ez taxes   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death. 1040 ez taxes Spouse is not the designated beneficiary. 1040 ez taxes   If your spouse is not the designated beneficiary of your HSA: The account stops being an HSA, and The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. 1040 ez taxes If your estate is the beneficiary, the value is included on your final income tax return. 1040 ez taxes The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. 1040 ez taxes Filing Form 8889 You must file Form 8889 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. 1040 ez taxes You must file the form even if only your employer or your spouse's employer made contributions to the HSA. 1040 ez taxes If, during the tax year, you are the beneficiary of two or more HSAs or you are a beneficiary of an HSA and you have your own HSA, you must complete a separate Form 8889 for each HSA. 1040 ez taxes Enter “statement” at the top of each Form 8889 and complete the form as instructed. 1040 ez taxes Next, complete a controlling Form 8889 combining the amounts shown on each of the statement Forms 8889. 1040 ez taxes Attach the statements to your tax return after the controlling Form 8889. 1040 ez taxes Employer Participation This section contains the rules that employers must follow if they decide to make HSAs available to their employees. 1040 ez taxes Unlike the previous discussions, “you” refers to the employer and not to the employee. 1040 ez taxes Health plan. 1040 ez taxes   If you want your employees to be able to have an HSA, they must have an HDHP. 1040 ez taxes You can provide no additional coverage other than those exceptions listed previously under Other health coverage . 1040 ez taxes Contributions. 1040 ez taxes   You can make contributions to your employees' HSAs. 1040 ez taxes You deduct the contributions on your business income tax return for the year in which you make the contributions. 1040 ez taxes If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. 1040 ez taxes   For more information on employer contributions, see Notice 2008-59, 2008-29 I. 1040 ez taxes R. 1040 ez taxes B. 1040 ez taxes 123, questions 23 through 27, available at www. 1040 ez taxes irs. 1040 ez taxes gov/irb/2008-29_IRB/ar11. 1040 ez taxes html. 1040 ez taxes Comparable contributions. 1040 ez taxes   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. 1040 ez taxes Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. 1040 ez taxes The comparability rules do not apply to contributions made through a cafeteria plan. 1040 ez taxes Comparable participating employees. 1040 ez taxes   Comparable participating employees: Are covered by your HDHP and are eligible to establish an HSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (part-time, full-time, or former employees). 1040 ez taxes   To meet the comparability requirements for eligible employees who have not established an HSA by December 31 or have not notified you that they have an HSA, you must meet a notice requirement and a contribution requirement. 1040 ez taxes   You will meet the notice requirement if by January 15 of the following calendar year you provide a written notice to all such employees. 1040 ez taxes The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies you that they have established an HSA will receive a comparable contribution to the HSA for the prior year. 1040 ez taxes For a sample of the notice, see Regulation 54. 1040 ez taxes 4980G-4 A-14(c). 1040 ez taxes You will meet the contribution requirement for these employees if by April 15, 2014, you contribute comparable amounts plus reasonable interest to the employee's HSA for the prior year. 1040 ez taxes Note. 1040 ez taxes For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees. 1040 ez taxes Excise tax. 1040 ez taxes   If you made contributions to your employees' HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. 1040 ez taxes Employment taxes. 1040 ez taxes   Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. 1040 ez taxes You must report the contributions in box 12 of the Form W-2 you file for each employee. 1040 ez taxes This includes the amounts the employee elected to contribute through a cafeteria plan. 1040 ez taxes Enter code “W” in box 12. 1040 ez taxes Medical Savings Accounts (MSAs) Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s). 1040 ez taxes After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless: You were an active participant for any tax year ending before January 1, 2008, or You became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan (HDHP) of an Archer MSA participating employer. 1040 ez taxes A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is eligible for Medicare. 1040 ez taxes Archer MSAs An Archer MSA is a tax-exempt trust or custodial account that you set up with a U. 1040 ez taxes S. 1040 ez taxes financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. 1040 ez taxes What are the benefits of an Archer MSA?   You may enjoy several benefits from having an Archer MSA. 1040 ez taxes You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040 or Form 1040NR. 1040 ez taxes The interest or other earnings on the assets in your Archer MSA are tax free. 1040 ez taxes Distributions may be tax free if you pay qualified medical expenses. 1040 ez taxes See Qualified medical expenses , later. 1040 ez taxes The contributions remain in your Archer MSA from year to year until you use them. 1040 ez taxes An Archer MSA is “portable” so it stays with you if you change employers or leave the work force. 1040 ez taxes Qualifying for an Archer MSA To qualify for an Archer MSA, you must be either of the following. 1040 ez taxes An employee (or the spouse of an employee) of a small employer (defined later) that maintains a self-only or family HDHP for you (or your spouse). 1040 ez taxes A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP. 1040 ez taxes You can have no other health or Medicare coverage except what is permitted under Other health coverage , later. 1040 ez taxes You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. 1040 ez taxes If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. 1040 ez taxes This is true even if the other person does not actually claim your exemption. 1040 ez taxes Small employer. 1040 ez taxes   A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. 1040 ez taxes The definition of small employer is modified for new employers and growing employers. 1040 ez taxes Growing employer. 1040 ez taxes   A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees. 1040 ez taxes The employer will continue to meet the requirement for small employers if he or she: Had 50 or fewer employees when the Archer MSAs began, Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and Had an average of 200 or fewer employees each year after 1996. 1040 ez taxes Changing employers. 1040 ez taxes   If you change employers, your Archer MSA moves with you. 1040 ez taxes However, you may not make additional contributions unless you are otherwise eligible. 1040 ez taxes High deductible health plan (HDHP). 1040 ez taxes   To be eligible for an Archer MSA, you must be covered under an HDHP. 1040 ez taxes An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses. 1040 ez taxes Limits. 1040 ez taxes   The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for HDHPs for 2013. 1040 ez taxes   Self-only coverage Family coverage Minimum annual deductible $2,150 $4,300 Maximum annual deductible $3,200 $6,450 Maximum annual out-of-pocket expenses $4,300 $7,850 Family plans that do not meet the high deductible rules. 1040 ez taxes   There are some family plans that have deductibles for both the family as a whole and for individual family members. 1040 ez taxes Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. 1040 ez taxes If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. 1040 ez taxes Example. 1040 ez taxes You have family health insurance coverage in 2013. 1040 ez taxes The annual deductible for the family plan is $5,500. 1040 ez taxes This plan also has an individual deductible of $2,000 for each family member. 1040 ez taxes The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($4,300) for family coverage. 1040 ez taxes Other health coverage. 1040 ez taxes   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. 1040 ez taxes However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. 1040 ez taxes However, you can have additional insurance that provides benefits only for the following items. 1040 ez taxes Liabilities incurred under workers' compensation laws, torts, or ownership or use of property. 1040 ez taxes A specific disease or illness. 1040 ez taxes A fixed amount per day (or other period) of hospitalization. 1040 ez taxes You can also have coverage (whether provided through insurance or otherwise) for the following items. 1040 ez taxes Accidents. 1040 ez taxes Disability. 1040 ez taxes Dental care. 1040 ez taxes Vision care. 1040 ez taxes Long-term care. 1040 ez taxes Contributions to an MSA Contributions to an Archer MSA must be made in cash. 1040 ez taxes You cannot contribute stock or other property to an Archer MSA. 1040 ez taxes Who can contribute to my Archer MSA?   If you are an employee, your employer may make contributions to your Archer MSA. 1040 ez taxes (You do not pay tax on these contributions. 1040 ez taxes ) If your employer does not make contributions to your Archer MSA, or you are self-employed, you can make your own contributions to your Archer MSA. 1040 ez taxes Both you and your employer cannot make contributions to your Archer MSA in the same year. 1040 ez taxes You do not have to make contributions to your Archer MSA every year. 1040 ez taxes    If your spouse is covered by your HDHP and an excludable amount is contributed by your spouse's employer to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year. 1040 ez taxes Limits There are two limits on the amount you or your employer can contribute to your Archer MSA: The annual deductible limit. 1040 ez taxes An income limit. 1040 ez taxes Annual deductible limit. 1040 ez taxes   You (or your employer) can contribute up to 75% of the annual deductible of your HDHP (65% if you have a self-only plan) to your Archer MSA. 1040 ez taxes You must have the HDHP all year to contribute the full amount. 1040 ez taxes If you do not qualify to contribute the full amount for the year, determine your annual deductible limit by using the worksheet in the Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. 1040 ez taxes Example 1. 1040 ez taxes You have an HDHP for your family all year in 2013. 1040 ez taxes The annual deductible is $5,000. 1040 ez taxes You can contribute up to $3,750 ($5,000 × 75%) to your Archer MSA for the year. 1040 ez taxes Example 2. 1040 ez taxes You have an HDHP for your family for the entire months of July through December 2013 (6 months). 1040 ez taxes The annual deductible is $5,000. 1040 ez taxes You can contribute up to $1,875 ($5,000 × 75% ÷ 12 × 6) to your Archer MSA for the year. 1040 ez taxes If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. 1040 ez taxes The contribution limit is split equally between you unless you agree on a different division. 1040 ez taxes Income limit. 1040 ez taxes   You cannot contribute more than you earned for the year from the employer through whom you have your HDHP. 1040 ez taxes   If you are self-employed, you cannot contribute more than your net self-employment income. 1040 ez taxes This is your income from self-employment minus expenses (including the deductible part of self-employment tax). 1040 ez taxes Example 1. 1040 ez taxes Noah Paul earned $25,000 from ABC Company in 2013. 1040 ez taxes Through ABC, he had an HDHP for his family for the entire year. 1040 ez taxes The annual deductible was $5,000. 1040 ez taxes He can contribute up to $3,750 to his Archer MSA (75% × $5,000). 1040 ez taxes He can contribute the full amount because he earned more than $3,750 at ABC. 1040 ez taxes Example 2. 1040 ez taxes Westley Lawrence is self-employed. 1040 ez taxes He had an HDHP for his family for the entire year in 2013. 1040 ez taxes The annual deductible was $5,000. 1040 ez taxes Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,750 (75% × $5,000). 1040 ez taxes However, after deducting his business expenses, Joe's net self-employment income is $2,500 for the year. 1040 ez taxes Therefore, he is limited to a contribution of $2,500. 1040 ez taxes Individuals enrolled in Medicare. 1040 ez taxes   Beginning with the first month you are enrolled in Medicare, you cannot contribute to an Archer MSA. 1040 ez taxes However, you may be eligible for a Medicare Advantage MSA, discussed later. 1040 ez taxes When To Contribute You can make contributions to your Archer MSA for 2013 until April 15, 2014. 1040 ez taxes Reporting Contributions on Your Return Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. 1040 ez taxes You should include all contributions you, or your employer, made for 2013, including those made by April 15, 2014, that are designated for 2013. 1040 ez taxes You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount you (or your employer) contributed during the year. 1040 ez taxes Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. 1040 ez taxes Follow the instructions for Form 8853 and complete the worksheet in the instructions. 1040 ez taxes Report your Archer MSA deduction on Form 1040 or Form 1040NR. 1040 ez taxes Excess contributions. 1040 ez taxes   You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier. 1040 ez taxes Excess contributions are not deductible. 1040 ez taxes Excess contributions made by your employer are included in your gross income. 1040 ez taxes If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. 1040 ez taxes   Generally, you must pay a 6% excise tax on excess contributions. 1040 ez taxes See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. 1040 ez taxes The excise tax applies to each tax year the excess contribution remains in the account. 1040 ez taxes   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. 1040 ez taxes You withdraw the excess contributions by the due date, including extensions, of your tax return. 1040 ez taxes You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. 1040 ez taxes Deducting an excess contribution in a later year. 1040 ez taxes   You may be able to deduct excess contributions for previous years that are still in your Archer MSA. 1040 ez taxes The excess contribution you can deduct in the current year is the lesser of the following two amounts. 1040 ez taxes Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year. 1040 ez taxes The total excess contributions in your Archer MSA at the beginning of the year. 1040 ez taxes   Any excess contributions remaining at the end of a tax year are subject to the excise tax. 1040 ez taxes See Form 5329. 1040 ez taxes Distributions From an MSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. 1040 ez taxes When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your Archer MSA to send you a distribution from your Archer MSA. 1040 ez taxes You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). 1040 ez taxes If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an additional 20% tax as well. 1040 ez taxes You do not have to make withdrawals from your Archer MSA each year. 1040 ez taxes If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. 1040 ez taxes A distribution is money you get from your Archer MSA. 1040 ez taxes The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. 1040 ez taxes Qualified medical expenses. 1040 ez taxes   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. 1040 ez taxes These are explained in Publication 502. 1040 ez taxes   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for MSA purposes. 1040 ez taxes A medicine or drug will be a qualified medical expense for MSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. 1040 ez taxes   Qualified medical expenses are those incurred by the following persons. 1040 ez taxes You and your spouse. 1040 ez taxes All dependents you claim on your tax return. 1040 ez taxes Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. 1040 ez taxes    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. 1040 ez taxes    You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your Archer MSA. 1040 ez taxes Special rules for insurance premiums. 1040 ez taxes   Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. 1040 ez taxes You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Archer MSAs. 1040 ez taxes Health coverage tax credit. 1040 ez taxes   You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. 1040 ez taxes See Publication 502 for information on this credit. 1040 ez taxes Deemed distributions from Archer MSAs. 1040 ez taxes   The following situations result in deemed taxable distributions from your Archer MSA. 1040 ez taxes You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2013. 1040 ez taxes Your account ceases to be an Archer MSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8853. 1040 ez taxes You used any portion of any of your Archer MSAs as security for a loan at any time in 2013. 1040 ez taxes You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. 1040 ez taxes   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the Archer MSA, Lending of money between you and the Archer MSA, Furnishing goods, services, or facilities between you and the Archer MSA, and Transfer to or use by you, or for your benefit, of any assets of the Archer MSA. 1040 ez taxes   Any deemed distribution will not be treated as used to pay qualified medical expenses. 1040 ez taxes These distributions are included in your income and are subject to the additional 20% tax, discussed later. 1040 ez taxes Recordkeeping. 1040 ez taxes You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. 1040 ez taxes Do not send these records with your tax return. 1040 ez taxes Keep them with your tax records. 1040 ez taxes Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). 1040 ez taxes If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. 1040 ez taxes Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. 1040 ez taxes If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. 1040 ez taxes Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. 1040 ez taxes You may have to pay an additional 20% tax, discussed later, on your taxable distribution. 1040 ez taxes If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. 1040 ez taxes Rollovers. 1040 ez taxes   Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. 1040 ez taxes An Archer MSA and an HSA can only receive one rollover contribution during a 1-year period. 1040 ez taxes See the Form 8853 instructions for more information. 1040 ez taxes Additional tax. 1040 ez taxes   There is a 20% additional tax on the part of your distributions not used for qualified medical expenses. 1040 ez taxes Figure the tax on Form 8853 and file it with your Form 1040 or Form 1040NR. 1040 ez taxes Report the additional tax in the total on Form 1040 or Form 1040NR. 1040 ez taxes Exceptions. 1040 ez taxes   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. 1040 ez taxes Balance in an Archer MSA An Archer MSA is generally exempt from tax. 1040 ez taxes You are permitted to take a distribution from your Archer MSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. 1040 ez taxes Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). 1040 ez taxes Earnings on amounts in an Archer MSA are not included in your income while held in the Archer MSA. 1040 ez taxes Death of the Archer MSA Holder You should choose a beneficiary when you set up your Archer MSA. 1040 ez taxes What happens to that Archer MSA when you die depends on whom you designate as the beneficiary. 1040 ez taxes Spouse is the designated beneficiary. 1040 ez taxes   If your spouse is the designated beneficiary of your Archer MSA, it will be treated as your spouse's Archer MSA after your death. 1040 ez taxes Spouse is not the designated beneficiary. 1040 ez taxes   If your spouse is not the designated beneficiary of your Archer MSA: The account stops being an Archer MSA, and The fair market value of the Archer MSA becomes taxable to the beneficiary in the year in which you die. 1040 ez taxes   If your estate is the beneficiary, the fair market value of the Archer MSA will be included on your final income tax return. 1040 ez taxes The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. 1040 ez taxes Filing Form 8853 You must file Form 8853 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. 1040 ez taxes You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA. 1040 ez taxes If, during the tax year, you are the beneficiary of two or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8853 for each MSA. 1040 ez taxes Enter “statement” at the top of each Form 8853 and complete the form as instructed. 1040 ez taxes Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. 1040 ez taxes Attach the statements to your tax return after the controlling Form 8853. 1040 ez taxes Employer Participation This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. 1040 ez taxes Unlike the previous discussions, “you” refers to the employer and not to the employee. 1040 ez taxes Health plan. 1040 ez taxes   If you want your employees to be able to have an Archer MSA, you must make an HDHP available to them. 1040 ez taxes You can provide no additional coverage other than those exceptions listed previously under Other health coverage . 1040 ez taxes Contributions. 1040 ez taxes   You can make contributions to your employees' Archer MSAs. 1040 ez taxes You deduct the contributions on the “Employee benefit programs” line of your business income tax return for the year in which you make the contributions. 1040 ez taxes If you are filing Form 1040, Schedule C, this is Part II, line 14. 1040 ez taxes Comparable contributions. 1040 ez taxes   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' Archer MSAs. 1040 ez taxes Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. 1040 ez taxes Comparable participating employees. 1040 ez taxes   Comparable participating employees: Are covered by your HDHP and are eligible to establish an Archer MSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (either part-time or full-time). 1040 ez taxes Excise tax. 1040 ez taxes   If you made contributions to your employees' Archer MSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. 1040 ez taxes Employment taxes. 1040 ez taxes   Amounts you contribute to your employees' Archer MSAs are generally not subject to employment taxes. 1040 ez taxes You must report the contributions in box 12 of the Form W-2 you file for each employee. 1040 ez taxes Enter code “R” in box 12. 1040 ez taxes Medicare Advantage MSAs A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. 1040 ez taxes To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines. 1040 ez taxes A Medicare Advantage MSA is a tax-exempt trust or custodial savings account that you set up with a financial institution (such as a bank or an insurance company) in which the Medicare program can deposit money for qualified medical expenses. 1040 ez taxes The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends. 1040 ez taxes An HDHP is a special health insurance policy that has a high deductible. 1040 ez taxes You choose the policy you want to use as part of your Medicare Advantage MSA plan. 1040 ez taxes However, the policy must be approved by the Medicare program. 1040 ez taxes Medicare Advantage MSAs are administered through the federal Medicare program. 1040 ez taxes You can get information by calling 1-800-Medicare (1-800-633-4227) or through the Internet at www. 1040 ez taxes medicare. 1040 ez taxes gov. 1040 ez taxes Note. 1040 ez taxes You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA. 1040 ez taxes Flexible Spending Arrangements (FSAs) A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. 1040 ez taxes FSAs are usually funded through voluntary salary reduction agreements with your employer. 1040 ez taxes No employment or federal income taxes are deducted from your contribution. 1040 ez taxes The employer may also contribute. 1040 ez taxes Note. 1040 ez taxes Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return. 1040 ez taxes For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier. 1040 ez taxes What are the benefits of an FSA?   You may enjoy several benefits from having an FSA. 1040 ez taxes Contributions made by your employer can be excluded from your gross income. 1040 ez taxes No employment or federal income taxes are deducted from the contributions. 1040 ez taxes Withdrawals may be tax free if you pay qualified medical expenses. 1040 ez taxes See Qualified medical expenses , later. 1040 ez taxes You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account. 1040 ez taxes Qualifying for an FSA Health FSAs are employer-established benefit plans. 1040 ez taxes These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. 1040 ez taxes Employers have complete flexibility to offer various combinations of benefits in designing their plan. 1040 ez taxes You do not have to be covered under any other health care plan to participate. 1040 ez taxes Self-employed persons are not eligible for an FSA. 1040 ez taxes Certain limitations may apply if you are a highly compensated participant or a key employee. 1040 ez taxes Contributions to an FSA You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. 1040 ez taxes This is sometimes called a salary reduction agreement. 1040 ez taxes The employer may also contribute to your FSA if specified in the plan. 1040 ez taxes You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. 1040 ez taxes However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. 1040 ez taxes When To Contribute At the