We have an ongoing excess contribution to my wife's IRA that is being penalized. I traced the problem back to my 2020 filing - Form 8889. When comparing how Turbotax filled out the 2019 form vs 2020 form, I see a discrepancy. W2 input in both years was exactly the same in term of boxes and codes. The difference is that line 2 of form 8889 shows 0 in 2019 and for 2020 shows the entire amount the employer contributed.
The only other difference in the two years was that a high deductible insurance plan was maintained for 12 months in 2019 and only 8 months in 2020 (after which my spouse was on Medicare). The calculations seem to account for this in proration, but Turbotax has treated the entire contribution as excess and that is the basis for the ongoing tax penalty
"to my wife's IRA" - I assume you meant "HSA".
"The difference is that line 2 of form 8889 shows 0 in 2019 and for 2020 shows the entire amount the employer contributed. " - Line 2? this is the amount you contributed personally and directly to the HSA, which did not go through the employer.
So you are saying that in 2020, line 2 on the 8889 had the same number as the code W value as on your 2020 W-2? This is highly unlikely.
"Turbotax has treated the entire contribution as excess" - are you referring to your tax return for 2020 or 2021?
On your 2020 tax return, do you have a form 5329? If so, what are the amounts on lines 42 through 49?
In 2020, what type of HDHP policy did you two have? Were you on an HDHP policy at all?
What were your total HSA contributions in 2020?
For 2021, are you under a HDHP policy? I see that your wife is not.
Thanks Bill for your reply. I though the entry on 8889 line 2 was pulled through from the W2, but evidently I entered it manually which cause the problem. Sorry for the confusion -- after receiving your reply, I went back to double check and caught this error. I have read somewhere that 8889 is confusing in it's terminology -- "employer contributions" are no those funded by the employer but rather those that the employee has withheld by the employer. That's the trap I fell into. Hopefully my mistake with help other here.
Thanks again for the help
"employer contributions" - close. Employer contributions are ones made/through the employer, so it could all be from the employer, all from you via payroll deduction, and a mix of each.
The reason why the IRS does this, is that the "employer" contribution is handled differently than direct contributions. Direct contributions (whether by you or someone else) are deducted from gross income on line 13 on Schedule 1, (1040). So this saves you federal income tax.
But the amount with code W in box 12 of your W-2 (the employer contribution) is removed from Wages in boxes 1, 3, and 5 on your W-2 before it is printed. So not only do you get the tax benefit of less income tax on the employer contribution, but you also save 7.6% because you don't pay any Social Security or Medicare tax on the employer contribution either. This is a benefit that most taxpayers are unaware of.
People complain constantly about the terminology - and yes, it is confusing - but it is really in their best interests to handle it this way. But you do wonder if the IRS could have just called it "X".