First, let's do your last question. Enter your 1099-SA as is. When the distribution code is 2, then TurboTax knows that this is the return of excess contributions plus earnings. The amount in box 1 is ignored (check it, you'll see) because TurboTax knows that the excess was taxed last year (the year before you enter the 1099-SA). Only the earnings in box 2 will be added (again, check and you'll see that this is true).
OK, on your 2023 return, TurboTax undoubtedly told you that you had an excess contribution of $3,850. As soon as TurboTax knew this, it added the $3,850 to Other Income on your return, because your HSA contributions were through your employer and therefore removed from Wages in boxes 1, 3, and 5 on you (her?) W-2...so that amount had to be added back to income.
However, you report that the total was $7,702. $3,850 was excess contributions and $2 was earnings that you withdrew. I have to ask you - how did TurboTax know about the $2 in earnings? You told TurboTax, didn't you.
I suspect that you manually added the $3,852 to Other Income, not realizing that TurboTax had already added the $3,850 automatically. Is that correct?
If so, you will want to amend your 2023 return, to remove the $3,852. As you see, TurboTax already added the $3,850, and the earnings were not to be taxed until 2024.
Also, how much excess did you withdraw in early 2024? $3,852, right? In the HSA interview in early 2024 (for the 2023 return), when TurboTax told you that the excess was $3,850, did you agree to withdraw all of it? If so, then there was no carryover to 2024, so no 6% penalty. That simplifies things, but do tell me if that is not what happened.
OK, think about this, and see if you have any questions.
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