FSA Tax: How to Report a Health FSA on Your Taxes

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A health flexible spending arrangement (FSA) is a health benefits plan established by an employer and is under the general category of health savings accounts (HSA) for tax purposes. Both the employer and employee may contribute to the plan. Withdrawals may be made by the employee for qualified medical expenses throughout the year. Contributions made by an employer can be deducted from the employee's gross income, and withdrawals from the account may be tax-free if made to pay qualified medical expenses. To take advantage of these tax benefits, the taxpayer must file Form 8889 along with her federal tax returns.

Gather your records for the tax year including records showing how much you and your employer contributed to your FSA as well as how much you withdrew. You will also need any records showing what medical expenses you paid with the funds from the withdrawals.

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Determine the amount of payments that were made from the account for qualified medical expenses. As a rule, qualified medical expenses are unreimbursed medical expenses that could be deducted on Schedule A.

Fill out Part I of Form 8889 with any contributions made by you or your employer to your FSA. Complete Part II if any distributions were made from your FSA. Complete Part III if you failed to meet the qualified individual test during any part of the testing period. Specific instructions and definitions can be found on the Internal Revenue Service website.

Transfer the amounts from Form 8889 to your 1040 federal tax return.