1. "Will Turbo Tax then give me an amount of an excess HSA contribution " Yes, in the HSA interview after to you entered your HDHP coverage and any additional contributions not on your W-2, TurboTax will announce (if this is the case) that you have excess contributions and give you not only the amount but also the option to withdraw none, some, or all of it before the due date of the return.
On the Summary in the Online product, there is a line "Excess employer contributions withdrawn", but as you can see, this is only reporting the results of that screen that I just referred to. The screen in the HSA interview that announces the excess and asks you how you want to handle it, is the screen you need to see.
In any case, the excess amount that TurboTax tells you in the HSA interview, is the amount that you should withdraw from the HSA using the exact phrase "withdrawal of excess contributions".
2. "Once I withdraw an excess amount from my HSA account, will TT then ask what the amount of the HSA excess amount I withdrew ?" No, TurboTax will assume that you will withdraw the amount that you said you would. TurboTax will not let you withdraw a different amount otherwise.
3. "It looks like there is a place for that on form 8889S Line 14 C Return of excess contributions." Line 14b contains the excess amount that was withdrawn, again based on what you entered in the step-by-step. Again please to all entries for the 8889 in the step-by-step. You are very likely to make mistakes if you try to enter data directly into the 8889.
4. "I am trying to avoid any penalties for excess HSA contributions and from my research I think the only way to rectify that is to withdraw the excess amount and indicate that you did that on your tax return. " When you withdraw the excess before the due date of the return, you avoid the penalty, but if this excess was from contributions made through the employer, then you will owe income tax on the excess, whether withdrawn or not. Note that the penalty is on any part of the excess that is carried over to the following year.
5. "I am trying to avoid any penalties for excess HSA contributions and from my research I think the only way to rectify that is to withdraw the excess amount and indicate that you did that on your tax return. " Yes, withdrawing the excess as much as possible is generally the best bet.
HOWEVER, withdrawing is not the ONLY way to handle the situation. When TurboTax is told to carry over part or all of the excess to the subsequent year, then TurboTax will try to apply that carryover amount as a personal contribution on line 2 of the 8889 in the subsequent year. In this way, the carryover will be used up and done with. Sometimes, this is the only way to deal with it, if, for example, you don't have enough cash in the HSA in the current year to withdraw all of the excess.
In addition, there is another way, but it is much more expensive. Use the carryover up in the next year is much better. NOTE: this means that in the next year, you will need to reduce the amount of HSA contributions that you otherwise might have made, so as to leave room for the carryover.
6. "I just want to be sure I rectify any overage in order to avoid any penalties now." As I noted, withdrawing as much as possible of the excess before the due date of the return is generally the best way to deal with the excess.
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