Deductions & credits

The $583 that you see on line 8 of Schedule 1 (1040) is almost certainly the same value as on line 18 and 20 on the 8889.

This is the amount of HSA exclusion that you took in 2019 that you would not have been eligible for had you not used the last-month rule in 2019. So this amount is added back to income in 2020.

In addition, you are charged a 10% penalty on this amount which is entered on line 21 of the 8889.

You will notice that there is no discussion of excess contributions here. That's because you don't cure the failure to maintain HDHP coverage by withdrawing "excess" contributions; instead, you pay income tax and a penalty on the amount you should not have been allowed to exclude from income in the previous year.

As for as the year 2019 is concerned, there were no excess contributions, because the last-month rule allowed you to use the full annual HSA contribution limit.

Now, as for your distribution in 2020, what you need to do is make a list of all the medical expenses you paid in 2020 with after-tax dollars, and apply as much of the $1,458.33 to those expenses as you can. You can add in any expenses in 2019 that were paid with after-tax dollars, so long as the expense was incurred after July 2019 (when you created your HSA).

This amount of reimbursed medical expenses is non-taxable. Whatever amount of the $1,458.33 that is left over will not only be taxable but subject to a 20% penalty. Thus, you are highly motivated to work on this list and have it available in case anyone from the IRS ever asks.

Yes, your HSA custodian will have this amount listed as a withdrawal of excess contributions, but you now realize that this was a mistake. Your paperwork will be correct, and you will be able to explain to any auditor why you did what you did.

To do this entry into TurboTax, you will enter the 1099-SA into the HSA interview. When TurboTax asks if the distribution was all for qualified medical expenses, you will have to answer "No", and indicate the amount that was left over (i.e., the amount that you could not tie to a qualified medical expense in the second half of 2019 or in 2020).

Had you not closed the old HSA, then you could have petitioned the old HSA custodian to accept that distribution as a "Mistaken Distribution" - you would have paid the $1,458.33 back and started over.

But I have seen that once an HSA is closed, the custodians don't like to reopen it (if they even are allowed to), so we can't fix this the elegant way.

"Could contribute back even if I am not under HDHP insurance now since it is just returning the mistake amount of excess contribution?" - You could do this ONLY is the old HSA custodian somehow allowed you to reopen the old HSA and then you convinced them to accept your return of the mistaken distribution. But they don't have to accept the Mistaken Distribution application, and we can't make them.

So, you can explain the situation to them and ask if you can reopen the HSA and return the Mistaken Distribution, in which case, you will send them a check for the $1,458.33, then spend it as needed for qualified medical expenses. But if they say no, then you will have to do what I outlined above.