1. Why is TT considering $300 excess contribution for 2023 even though we made exact contributions (total) as per limits?
Because, as you suspect, the $300 from 2022 was carried over to 2023, so you inadvertently made excess contributions in 2023, too.
2. Was the $300 excess 2022 contribution that got rolled over in 2023, considered contributions for 2023 too?
Yes. Up until a couple of weeks ago, it was invisibly put on line 2 of the 8889 (the IRS does not give any instructions and where to report the carryover). TurboTax has done this for years. However, the IRS cleverly changed the error checking at e-file to reject a return in the cases where Line 13 (8889) was not the smaller of Line 2 and line 12. So TurboTax had to do a hurry-up change, and now the carryover prints on line 2 (or is added to your personal contribution and printed).
3. Should I withdraw $300 before Apr 2024 tax deadline and indicate the same in TT (for tax year 2023). But this will in reality reduce our 2023 HSA contributions by $300.
If TurboTax will let you withdraw the $300, then do so. Yes, of course, it reduces your contribution for 2023.
4. I assume any HSA distributions (for excess withdrawal) will be indicated in 1099-SA form and will need to be filed with TT and taxed. But correct me if I am wrong.
Yes, the withdrawals will be reported on a 1099-SA (separate from the 1099-SA for your regular medical expenditures). But, no, only the earnings on the 1099-SA will be taxed. This is because the moment that TurboTax found that you had excess HSA contributions, if the contributions were through your employer (i.e., with code W in box 12 on your W-2), then the excess was added back to other Income, or if you made the HSA contributions directly to the HSA custodian (it sounds like you did), then the amount of the contribution on line 13 (form 8889) is reduced by the amount of the excess.
Please do not try to make any manual adjustments for taxing the excess - TurboTax will do all this automatically.
If I reduce my HSA 2023 contributions by $300 in TT, then It does not complain about excess 2023 contribution in $300
This is what you should do, because the carryforward of excess contributions can be erased by (1) making space for the carryover to be used up in the subsequent, or (2) making a distribution for non-medical purposes, which is declared as income and hit with a 20% penalty (obviously, #1 is highly preferable).
I am concerned about your September withdrawal, because the withdrawal of the excess if supposed to happen by the due date. Did you have a form 5329 on your 2022 return? Or perhaps did you not file until October 15, 2023?
Please let me know, so that I can address this.
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