How TurboTax handle "applying your HSA excess contributions to the following year"

[wleuter]

We over contributed our HSA in 2022. I know there are two ways to correct it, one of them it applying your HSA excess contributions to the following year. So I moved the excess contributions to 2023 using my.healthequity.com.

But TurboTax seems not able to handle it. When I did my tax return with TurboTax, it only has one option which is withdraw the excess contribution. I had to choose that option. Then after I filed my tax return, I found TurboTax add that excess contribution to my income which increased my tax in 2022.

How can I fix it with a new tax amend? Does TurboTax has the option for applying HSA excess contributions to the following year? That way I don't need to pay that unnecessary tax in 2022.

[dmertz]

" I moved the excess contributions to 2023 using my.healthequity.com."

It's not clear what you mean by this.  However, I think you mean that in 2023 by the due date of your tax return, including extensions, you requested that the excess contribution be returned and that the cash you received from doing so (an amount adjusted for investment gain or loss attributable to the excess) be applied as a contribution for 2023.  In that case you should be telling 2022 TurboTax that you had the excess returned and you should be telling 2023 TurboTax that the cash you applied for 2023 is part of your personal HSA contribution for 2023.  Nothing about a contribution for 2023 is reportable on a 2022 tax return.

If this is what you did, near the end of January 2024 you should be receiving a 2023 Form 1099-SA with code 2 in box 3.

[wleuter]

Thanks for your reply @dmertz 

When you say "In that case you should be telling 2022 TurboTax that you had the excess returned ", what should I do for this?

Should I just simply update my HSA contribution to remove excess contributions part because I moved it to 2023 already?

Thank you!

[dmertz]

Enter into 2022 TurboTax the HSA contributions that you made, either those reported with code W in box 12 of your W-2 or personal contributions, without regard to any distribution of the excess. TurboTax will then inform you that you made an excess contribution and give you the opportunity to indicate how much of the excess contribution was returned to you ("withdrawn").  You indicated in your original post that you saw where to make this entry.  The amount of excess contribution that you indicate was returned will be treated by TurboTax as an amount not contributed.

(Note, however, that if you made a personal HSA contribution in 2023 for 2022 and you subsequently requested that some or all of that contribution be reallocated to 2023, that's a different matter.  This does not seem to be what happened, though, because you indicated that you made an excess contribution "in 2022."  I'm assuming that that contribution was for 2022, not for 2021.)

[wleuter]

@dmertz 

TurboTax only gives me "Withdraw" option which is not correct for my case because I didn't withdraw money, instead, I forwarded the excess contribution to 2023 which is one of  two ways to correct it without being taxed.

So if I choose "Withdraw" option, the money I withdraw will be counted as my another income by TurboTax and will be taxed for the year 2022.

Do you know if I have other ways to fix it? Like should I simply update the HSA contribution number in my W2?

Thank you!

[dmertz · Accepted solution]

You mentioned that TurboTax added the excess amount to your taxable income.  This implies that you made an excess contribution through your employer and your HSA contributions were reported with code W in box 12 of your W-2.  This means that correcting the excess contribution to avoid an excess-contribution penalty required a return of contribution paid to you.  The fact that you had the HSA custodian apply the resulting cash as part of your 2023 contribution rather than paying it directly to you does not change the fact that you received a distribution from the HSA (a "withdrawal" as TurboTax calls it, but that's a poor use of the word).  Due to the requirement that the distribution include any investment gain or loss attributable to the excess contribution being returned, the amount of cash contributed for 2023 is likely a bit different than the amount of contribution that was returned.

Note that even though the excess was returned, the excess is still includible in your 2022 income because it was excluded from the amount in box 1 of your 2022 Form W-2.  The purpose of obtaining the return of excess contribution was to avoid a 6% excess-contribution penalty for 2022, not to exclude the excess from taxation on your 2022 tax return.  When you report in 2023 TurboTax the amount of cash distributed from your HSA as a personal contribution for 2023 you'll receive a deduction for this contribution on 2023 Schedule 1.

Do not change the code-W amount in box 12 of TurboTax's W-2 form.

[wleuter]

@dmertz Thanks for your reply. It is really helpful!

I understand the excess contribution should be taxed for the year 2022 even I forwarded it to 2023.

You mentioned 

When you report in 2023 TurboTax the amount of cash distributed from your HSA as a personal contribution for 2023 you'll receive a deduction for this contribution on 2023 Schedule 1.

Can you give me a little bit more details about it? How I can do to report it via TurboTax online version?

Thank you very much! 

[dmertz]

First, if your HSA is subject to investment gains or losses or to maintenance fees, you'll want to look at your HSA history to see how much cash actually became a contribution for 2023 since investment performance while the excess was contribution for 2022 was present in the account will affect that amount.

Once you know the amount, in the HSA section of 2023 TurboTax you'll indicate that you put money into an HSA in 2023, then enter this amount as a contribution you personally made.  Make sure that you have adjusted the HSA contributions made through your employer to avoid the total, including this amount of contributions you personally made, being over the contribution limit for 2023.