Tax time is upon us again, and this is a reminder that HSA contributions made by an employer, employee, or other relation are tax deductible. However, it is important to differentiate between HSA contributions made through a payroll system and those you make outside of the payroll system. The difference lies in how payroll taxes are applied.

If you or (your employer) make contributions to your HSA account through your payroll system, there really isn’t much to do on your end. Because these contributions are processed in the payroll system, they are flagged as having no income / payroll taxes applied. Thus, come tax time, you will notice your taxable income decreased by the amount of your HSA contribution.

However, you need to take action and deduct contributions you make manually to your HSA. For example, if you have an HSA and you email a check to your custodian (bank) or do an automatic deposit from your bank, you are entitled to tax deductions on this money. Think about it this way: HSA contributions are tax deductible, and you are contributing income that has already been taxed (when you received your check) to your HSA. Thus, you would not be receiving the proper tax treatment of your contributions. Note that you will need to file regular form 1040, not the form 1040-EZ, to classify these contributions as tax deductible.

Having contributions that are tax deductible is the most important of an HSA’s triple tax advantage. This deduction can be quite significant; it will be a savings of:

Contribution x Tax Rate = Tax Savings

Thus, it is definitely in your interest to remember to deduct your HSA Contributions.

Another rarer example is if you have a family member or friend making contributions to your HSA account. In this case, the deduction occurs on the recipient’s income taxes. A gift tax deduction may also occur for the party providing the contributions.

Note: You can make HSA contributions for 2013 up until the tax filing deadline of April 15th, 2014.