You had a $1,600 excess contribution in 2021, but only $500 left in your HSA. When you correctly withdrew the excess that you could and brought your balance to $0, you still have an excess contribution of $1,100 but you will not be taxed on it. The 6% tax is on the lesser of your over-contribution or the total value of your HSAs.
This excess contribution will carry forward and continue to lurk on your tax return in future years. If you were to get another HDHP at a later date and contribute to your HSA, you will need to under contribute that first year or these excess contributions will come back to haunt you.
To ensure you are not taxed on this in TurboTax, make sure you enter $0 when it asks What's the total value of all your HSAs after putting in your $500 withdrawal of excess contributions. Once everything is entered correctly, you will pay no tax on your over-contribution. You can verify this by looking for Schedule 2 Line 8 of your tax return. If you do not have a Schedule 2, that means you are not paying the additional tax:
- Open or continue your return.
- Select Tax Tools in the left menu (if you don't see this, select the menu icon in the upper-left corner).
- With the Tax Tools menu open, you can then view your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu
- Scroll down until you see Schedule 2 Line 8 Additional Tax on IRAs or other tax-favored accounts. If this line is blank or you have no Schedule 2, then you are not paying the 6% tax on your HSA.
