Thank you @Opus 17 ! When you say:
"The principal (contribution) part of the withdrawal is not taxable as such. Instead, the contributions (from box 12 of her W-2s) will be added back to her taxable income as if it was part of her wages all along and not an HSA contribution. Because the contributions are taxed, the withdrawal of the contributions is not taxed again. "
I'm trying to understand what you said "Because the contributions are taxed":
The contributions my wife made to the HSA is pre-tax, and hasn't been taxed yet. So when she withdraws the excess contributions (assuming in August 2025), and if the HSA bank just returns the excess contribution plus attributed earnings, not withholding taxes as you said, then the contribution withdrawal will not be taxed, and is never taxed until we file the 2025 taxes in early 2026. The withdrawal amount of the contribution is like the self-employed and independent contractors income (for example, like Youtubers get the pay from google, taxes are not deducted, and need to report and calculate on their own), and will be added to our total 2025 income when we file the 2025 taxes in early 2026, then decide how much taxes we owe then. Is my understanding correct?
Thank you again @Opus 17 !
