Deductions & credits

Have you entered your 2022 tax return yet? What was the excess HSA contribution amount reported to you by TurboTax? Was it the $25?

We discourage taxpayers from withdrawing the excess amounts before TurboTax has a chance to tell them what the excess is, because it is difficult for taxpayer to accurately determine the actual excess amount.

Also, the HSA is not a savings account from which you can willy-nilly withdraw dollars. Technically, when you withdrew that $600, it was not a withdrawal of excess contributions. Only the first $25 was a withdrawal of excess contributions. The other $575 was a distribution for purposes other than paying qualified medical expenses. This mean that the $575 should be added to Other Income and penalized 20% on top of that.

This is why TurboTax does not provide an easy way for you to indicate what you think the excess ought to be - because the $600 was not the excess, only the $25 was.

There are two steps to deal with this:

1. Contact your HSA custodian and tell them that the "withdrawal" of the excess was a mistaken distribution - it should have been $25. They don't have to allow this, so be nice. If all goes well, they will ask you to complete a form and to send them a check for the amount (i.e., return the money).

2. Then ask the HSA custodian to withdraw the $25 as the excess HSA contribution.

If these two steps don't work out for you, then ask yourself if you have $575 in unpaid medical bills now or in the very near future to which you can apply the $575 as a reimbursement. The IRS does not specify a time limit on when these bills must appear vis-à-vis the reimbursement, but clearly, the IRS does not intend for you to ask to be reimbursed years before the bill comes.

P.S., If the final action is easier to achieve that steps 1 and 2 (i.e., the unpaid medical bills are already at hand), then just document which bills were paid by the $575 and stick it in your tax files in case anyone ever asks, and skip the first two steps.