How are contributions to a Health Savings Account (HSA) treated for tax purposes?

Contributions to a Health Savings Account (HSA) are considered tax-deductible and not subject to federal income tax at the time of deposit. This means that individuals can contribute pre-tax dollars to their HSA, reducing their total taxable income for the year. Furthermore, the funds within the HSA grow tax-free, and withdrawals for qualified medical expenses are also tax-free. This tax treatment is designed to encourage individuals to save for healthcare costs.

The rationale behind why contributions are not taxed at the time of deposit aligns with the purpose of HSAs, which is to provide a means for individuals to save money in a tax-advantaged account specifically for medical expenses. Because of this favorable tax treatment at both deposit and withdrawal (when used for qualified expenses), HSAs serve as a powerful tool for managing healthcare costs effectively.

In contrast, other options describe situations that do not align with the actual tax treatment of HSAs. For example, stating that contributions are taxable at the time of deposit contradicts the fundamental tax benefits of HSAs. Similarly, indicating that they are always subject to state income tax overlooks the federal provisions that benefit HSA holders.