Sorry @dmertz one more follow up post:
1) You said if I state $248 in medical expenses on my 2024 return, then the earnings on excess would avoid the tax and 20% penalty, yes?
2) So on my 2025 return, when I have my 2024 (timely returned) excess and earnings to report, will that excess on earnings also avoid the tax? It looks like 8889 Line 14a (total 2025 distributions) would be completely offset by Line 14b (2024 excess and earnings withdrawn by due date), resulting in Line 16 showing zero taxable HSA distributions, is that correct?
I don't understand the logic of timely-withdrawn excess contributions being taxed while the earnings on that excess are not. Seems like a loophole for untaxed gains (especially on the 2024 earnings on excess). Maybe I'm missing something. Do the earnings on excess from Box 2 make their way to the 1040 in some other way to be taxed?
