According to the IRS, you must keep records sufficient to later show that:

•  Any distributions were exclusively used to pay or reimburse qualified medical expenses,

•  The qualified medical expenses had not been previously paid or reimbursed from another source, and

•  The medical expenses had not been taken as an itemized deduction in any year.

Do not send these records with your tax return. Keep them with your tax records. 

How you report your distributions depends on whether or not you use the distributions for qualified medical expenses.

•  If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889.  Follow the instructions for the form and file it with your Form 1040.

•  If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution.  Report the amount on Form 8889 and file it with your Form 1040.  If you have a taxable HSA distribution, include it in the total on Form 1040, line 21, and enter “HSA” and the amount on the dotted line next to line 21.  You may have to pay an additional 10% tax on your taxable distribution.

Additional tax.   There is an additional 10% tax penalty on any part of your distributions not used for qualified medical expenses.  Figure the tax on Form 8889 and file it with your Form 1040.  Report the additional tax on Form 1040, line 62, and enter “ HSA ” and the amount on the dotted line next to line 62.

Exceptions.   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

Make sure you check the directions for each years 1040 form because they can change.