Deductions & credits

As you can imagine, it is difficult to diagnose situations on returns that we cannot see. However, your description is consistent with the following sequences of events:

• You entered your original return way back when.
• When you did so, you made an inconsistent entry, like entering payroll contributions made through your employer as "personal" contributions on the "Let's Enter [name]'s HSA contributions" screen (this is a common error).
• In this case, it is a common situation that the taxpayer receives an error message about excess contributions (doesn't allows happen), because it appears to TurboTax that you made excess contributions when in fact you didn't (you just misreported the contributions to TurboTax).
• You indicated that you will agree to withdraw the excess by July 15th.
• When you go through the same tax return again, you don't see the same message. Why? Because TurboTax remembers that you said that you withdrew it the last time. This is an unfortunate consequence of the dynamic nature of the input screens - sometimes it is not possible to get the same screens to come up on the second pass (which is why I encouraged you to just delete all the HSA data and start over).
• Now you say that you started the whole return from scratch, and that this time you did not receive the excess contribution error message. Yes, there have been many software updates, but few in this area of the program so that is not likely the problem.
• Instead, the more likely case, based on the thousands of HSA questions I have answered in the last 4 years, is that you changed your input on the last pass without realizing the impact. If, for example, you made all of your HSA contributions through your employer (code W in box 12 on your W-2) and did not enter any part of this as a "personal" contribution, then the cause of your "excess" (assuming that you actually did not contribute too much) has been eliminated, and your final return is correct.

Assuming that your HSA contributions were not in excess (and you should be able to figure this out on your fingers), then you are right to wonder what to do about the withdrawal of excess contributions  that you have already taken. There are two answers:

First, try this: contact your HSA custodian and report a "mistaken distribution". If they accept this, they will ask you to send them a check for that amount (since they sent it to you, they'll want it back), and they will pretend for their records that thedistribution never happened.

NOTE: the HSA custodian does not have to accept your request, so be nice (grovel, even). This will be the simplest way to deal with this, if you have the money to send back.

NOTE NOTE: you HAVE to do this by October 15th, so call the HSA custodian as quickly as possible. Many HSA custodians have a description for the process and maybe even a form on their website, so go look, but call if you can't find it.

Second, if they won't accept your request to be able to return a mistaken distribution, then see if you can charge the amount of the withdrawal against previous medical expenses paid from your regular accounts (not HSA) since the date of the creation of your HSA. If you take a distribution of $1,000 (for example), and find that you have $1,000 or more in medical expenses incurred since the creation of the HSA, then you can apply the distribution of $1,000 to those previous expenses - you just need to document that and put it in your tax file. Note: these expenses must have been paid for with after-tax dollars; that is, not reimbursed by your insurance nor deducted on Schedule A.

If you can't do this, then you would be required to report the distribution (the HSA custodian will send you a 1099-SA for the distribution if they haven't already) and you will have to indicate that it was not for qualified medical expenses. This will cause the distribution to be added to your income AND create a 20% penalty. Obviously, you are motivated to avoid this.

Since I don't know exactly when you reported the excess contribution nor what the HSA custodian will do in this unusual year, you will likely not see the 1099-SA reporting the withdrawal until early next year. NOTE: if you succeed in getting them to accept a check from you to return the mistaken distribution, then they are required to send out a corrected 1099-SA...except that it would have zero as the distribution which wouldn't make any sense and which TurboTax might not accept. This is just one of those situations which the current IRS procedures just don't cover very well. All you can do is create the tax return as accurately as possible and keep copious notes on why you did what you did in case anyone ever asks...