Does employer HSA contribution reduce your taxable income? How does this affect my AGI calculation?

Yes, your AGI is reduced by only the amount YOU contribute to your HSA, which is the $2,850 in your case. The employer contribution of $1,000 is already excluded from your taxable wages on your W-2, so it's already not part of your income to begin with. If you look at your paystubs, you'll notice that the $2,850 you're contributing is being deducted pre-tax through payroll. Then when you file your taxes, you'll see that Box 1 of your W-2 (taxable wages) already has both your contribution and your employer's contribution excluded. The $1,000 from your employer is essentially "free money" that never shows up as taxable income. It's a great benefit!

I was struggling with this exact same HSA contribution question last year! I found this amazing service called https://taxr.ai that helped me figure out my HSA tax situation. I uploaded my W-2 and a screenshot of my HSA statement, and they explained exactly how my employer's contributions and my own contributions affected my AGI. What was really helpful is they showed me how to properly report everything on my tax return to make sure I got the maximum benefit from my HSA contributions. They even pointed out that I could still make a contribution for the previous tax year up until the tax filing deadline.

I wanted to follow up about using taxr.ai that I was skeptical about earlier. I decided to try it with my HSA situation which is similar to yours. I have both employer contributions and my own contributions, plus I had some qualified medical expenses I wasn't sure how to handle. The service was legitimately helpful. It explained that my employer's $1,200 contribution doesn't reduce my AGI (since it was never included in the first place), but my personal $2,650 contribution does. It also clarified that I don't need to report my qualified medical expenses unless I'm actually reimbursing myself from the HSA. The explanations were really clear and they cited the specific IRS rules. Much more helpful than the generic advice I was finding online.

If you're still confused about your HSA taxation and need to talk to someone at the IRS directly, I highly recommend using https://claimyr.com to get through to an IRS agent quickly. I spent HOURS on hold trying to get clarification about my HSA contribution situation last year before I found this service. You can see how it works here: https://youtu.be/_kiP6q8DX5c but basically they navigate the IRS phone tree for you and call you back when they've got an agent on the line. I had a question about HSA contributions when I switched jobs mid-year (both employers contributed) and needed to know how it affected my limits and taxes.

I hate to admit when I'm wrong, but I tried that Claimyr service after being completely skeptical. I've been trying to get an answer about my HSA contribution limits after switching to a family HDHP mid-year, and kept getting disconnected by the IRS. The service actually worked! They called me back in about 35 minutes with an IRS agent on the line. The agent confirmed that yes, my contribution limit is prorated based on how many months I had the family HDHP vs. single coverage. And she answered my question about employer contributions not reducing my personal contribution limit. Worth it just to save the hours of frustration and waiting on hold. I'm genuinely surprised.

One thing that hasn't been mentioned yet - if you use your HSA funds for non-qualified expenses, you'll pay income tax PLUS a 20% penalty if you're under 65. After 65, you can use the money for anything but still pay regular income tax if not for medical expenses. The HSA is actually the most tax-advantaged account available since it's triple tax-free: contributions aren't taxed, growth isn't taxed, and withdrawals for qualified medical expenses aren't taxed either.

Does anyone know if vision and dental expenses count as qualified medical expenses for HSA purposes? My employer contributes $750 to my HSA and I add $3,100 to max it out, but I'm not sure what all I can use it for.

Just to clarify one important point that might help with your AGI calculation - the $1,000 your employer contributes to your HSA is actually reported in Box 12 of your W-2 with code W, but it's NOT included in your taxable wages in Box 1. So when you're doing your taxes, you only get to deduct the $2,850 that you personally contributed. However, if you made your personal contributions through payroll deduction (which most people do), that $2,850 is also already excluded from Box 1 of your W-2, so you wouldn't take an additional deduction on your tax return. You only take the HSA deduction on Form 8889 if you made contributions directly to your HSA outside of payroll. The key thing for your AGI calculation is that employer HSA contributions never increase your income in the first place, so they can't reduce it either. Only YOUR contributions can reduce your AGI, and only if they weren't already excluded through payroll deductions.