Health Savings Accounts (HSAs) are one of the most valuable tools available for managing healthcare expenses while optimizing your tax strategy. With triple tax benefits—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—HSAs can significantly enhance your financial planning.

But while HSAs offer plenty of advantages, many individuals and small business owners face costly pitfalls during setup or usage. As a trusted tax & accounting firm in Fairfax, we've helped countless clients implement HSAs the right way, avoiding common mistakes that could lead to tax penalties or lost benefits.

1. Not Verifying Eligibility Before Contributing

Many people assume they qualify for an HSA just because they have health insurance. In reality, only those enrolled in a high-deductible health plan (HDHP) can contribute to an HSA. You also can't have other coverage that disqualifies you—such as Medicare or a general-purpose FSA.

CPA Tip: We carefully review your insurance coverage and financial profile to ensure HSA eligibility. Our clients often benefit from early guidance that helps them avoid disqualification or unnecessary tax issues.

2. Ignoring IRS Contribution Limits

The IRS sets strict annual limits on how much you can contribute to your HSA. For 2025:

• $4,150 for individuals
• $8,300 for families
• Plus an extra $1,000 for individuals 55 and older

Exceeding these limits can trigger a 6% excise tax on the excess amount if not corrected promptly.

CPA Tip: Our firm integrates HSA contributions into your broader tax preparation services in Fairfax, ensuring accurate tracking and reporting. We help you stay within limits while optimizing your deductions.

3. Spending HSA Funds on Non-Qualified Expenses

Not every health-related expense is eligible for tax-free withdrawal. Using HSA funds for non-qualified purchases—like elective cosmetic procedures or gym memberships—can result in a 20% penalty plus income tax, unless you're over age 65.

CPA Tip: We provide clients with an updated list of IRS-approved expenses. If you're unsure whether a purchase qualifies, our team can quickly advise you before the transaction is made.

4. Failing to Keep Documentation

While the IRS doesn’t require submitting receipts with your tax return, you must have proof of each qualified medical expense in case of an audit. Many individuals lose out simply because they didn’t save the necessary documentation.

CPA Tip: We recommend keeping digital copies of all receipts. As a tax & accounting firm in Fairfax, we also offer periodic audits of your records to ensure you're well-prepared for any future IRS inquiries.

5. Missing Investment Opportunities

Some HSA providers allow account holders to invest their balance once it reaches a minimum threshold. Yet many people leave funds in a low-interest savings account, missing out on years of tax-free growth.

CPA Tip: We advise clients on how and when to shift funds from cash to investments—based on your overall retirement goals and risk profile. Your HSA can be a powerful secondary retirement account if managed properly.

6. Overlooking Employer Contribution Options

Employers and self-employed professionals can contribute to an HSA for themselves or their employees as a tax-deductible benefit. However, these contributions must be carefully managed and reported to avoid IRS issues.

CPA Tip: We guide business owners on structuring employer HSA contributions for maximum tax efficiency. Whether you're an LLC or sole proprietor, we ensure compliance while enhancing employee benefits.

7. Forgetting to Name a Beneficiary

HSAs are part of your financial estate and should include a designated beneficiary. If you pass away without one, your account could become fully taxable to your estate or heirs.

CPA Tip: During your account setup, we review beneficiary options with you. We also revisit them annually as part of our ongoing tax preparation services in Fairfax to keep your information up to date.

8. Not Factoring HSAs Into Year-End Planning

Many people forget that they can make last-minute HSA contributions before the tax filing deadline to reduce taxable income. Unfortunately, this missed opportunity often leaves money on the table.

CPA Tip: We incorporate HSA strategy into your year-end planning so that you can use every available deduction before filing. Whether you’re filing as an individual or a business, we ensure no advantage goes unused.

Final Thoughts: A Smart HSA Strategy Starts with Expert Support

While Health Savings Accounts offer unmatched tax benefits, implementing them correctly requires attention to detail and strategic planning. From contribution limits to qualified expenses and long-term investment options, every choice can impact your financial health.

At Raj and Associates CPA PC, we specialize in helping individuals, families, and small businesses implement HSAs the right way—maximizing benefits and avoiding costly missteps. If you're looking for a reliable tax accountant in Fairfax VA, our experienced team is here to guide you every step of the way.

Have questions or need help setting up your HSA? Email us at contact@rajcpapc.com to schedule your personalized consultation.