Thank you for showing me the HSA custodian form. Now I understand.
In fact, you did not withdraw anything, correct? That is, you did NOT receive a check for $3,550 in early 2021 from the HSA custodian, but instead carried the 2020 excess over to 2021. Unfortunately, since we use precise terms in the tax world, what I was reading was quite confusing.
OK, when you were doing your 2020 TurboTax tax return, and TurboTax asked you how you wanted to handle the excess, did you answer (1) you would withdraw it, (2) withdraw some of it, or (3) withdraw none of it and let it carry over to next year. If you said that you would withdraw it, well, that was the wrong answer, so your 2020 tax return will need to be amended. However, I will admit that at this point, I am not sure what you did, so please remind me what you told TurboTax. Hint: if you answered option #1, then the 3,550 would have been added to line 8, Other Income, on Schedule 1 (1040). If you answered option #3, then that income would not be there (which would be correct).
OK, now let me redescribe the process for you.
2020
Your annual HSA contribution limit was 7,100. You contributed 7,100 and 3,550 for a total of 10,650. The created an excess of 3,550.
You "carried over" the 3,550 excess from 2020 to 2021. Behind the scenes (because this is not very clear from form 8889) what happens is that the annual HSA contribution limit for 2021 is reduced by the carry over amount, so the 2021 limit of 7,200 is reduced to 3,650. Again, this is not obvious on form 8889 in 2021.
2021
Your annual HSA contribution limit for 2021 is now 3,650 (see above). You contributed (5,700+240) + (3,600 + 1,000) for a total of 10,540. This makes an excess for 2021 of 6,890.
However, note this: you have until the due date of the return (as extended) to withdraw the excess for any given year; after the due date, has passed, you can no longer fix the excess by withdrawing it.
This means that for the excess for 2020 of 3,550, you can no longer withdraw to "cure" it, because today's date is after May 17, 2021 (June 15, 2021 for taxpayers in Texas, Louisiana, and Oklahoma), i.e., the "normal" due dates as changed by the IRS last year.
Now there are only two ways you can fix the excess from 2020:
- reduce your HSA contributions in a future year so that the excess which is carried over is used up by being added to the next year's contributions, or
- make an HSA distribution NOT for medical expenses, which will show up as Other Income on Schedule 1 (1040) and will also generate a 20% penalty.
So when you actually withdraw the excess for 2021, you can withdraw only the 2021 excess of 3,340 before the due date of the 2021 return (April 18, 2022 this year, except for Maine and Massachusetts which are April 19, 2022). The 2020 excess cannot be withdrawn with 2021 excess; instead the 2020 excess must be cured in one of the two ways listed above in the bulleted list.
The most less painless way to handle this is to reduce your HSA contributions in the following year so that the carry over is used up along with your regular HSA contributions.
Does all this makes sense?
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