You Make the Call - Nov. 5, 2026

Question: In November 2026, Morgan's father died and named Morgan, his adult child, as the sole beneficiary of his health savings account (HSA). The account had a fair market value (FMV) of $32,000 on the date of death. Morgan did not withdraw any funds from the account during 2026. However, Morgan paid $5,200 in unreimbursed qualified medical expenses incurred by her father before death. The expenses were paid in December 2026. Must Morgan report the inherited HSA as taxable income on the 2026 federal income tax return, even though no funds were withdrawn?

Answer: Yes. Morgan must include $26,800 in gross income for 2026, even though no funds were withdrawn from the inherited HSA.

Under §223(f)(8), when an HSA beneficiary is someone other than the deceased account holder's surviving spouse, the account ceases to be an HSA on the date of death. The account's FMV on that date becomes taxable to the beneficiary in the year of death.

However, a nonspouse beneficiary may reduce the taxable amount by qualified medical expenses incurred by the deceased account holder before death and paid by the beneficiary within one year after death.

Morgan's taxable income from the HSA is calculated as follows:

• HSA FMV at death: $32,000
• Qualified medical expenses paid: $5,200
• Taxable amount: $26,800

Morgan reports the inherited HSA on Form 8889, Health Savings Accounts, entering “Death of HSA account beneficiary” across the top and skipping Part I. The $32,000 date-of-death value is entered on line 14a, and the $5,200 of qualifying medical expenses is entered on line 15. The $26,800 taxable amount is included in other income on Schedule 1 (Form 1040), Additional Income and Adjustments to Income.

The inherited amount is not subject to the additional 20% tax imposed on certain nonqualified HSA distributions.