Deductions & credits

@MrHarriet 

The excess contribution is always there unless it is removed in one of the allowed ways.  Think of it this way, suppose you have a balance of $5000 with $4000 of excess contributions and $1000 of allowable contributions, and you spend $4100 on medical care leaving you a balance of $900.  That $900 is all excess, because if it were not for the excess, your balance would be zero.

Side note, if you were contributing $300 per month, your excess for 2021 should be $300 or $600, I don't see where $475 comes from.

You have several scenarios, I will deal with the two extreme scenarios.

If you want to remove all excess balances, this is what will happen in chronological order.

1. File an amended 2021 return to report your change in insurance circumstances. The excess contribution will be added back to your taxable income plus a 6% penalty.  You must do this first because you need information from your 2021 return to amend your 2022 return, no matter what you plan to do.
2. Remove $3600 from the HSA as a return of excess (the 2022 contributions).  Then, prepare and file an amended 2022 return to report the excess and indicate you removed it.  The excess will be added back to your taxable income but you will only be assessed a 6% penalty on the $475 excess from 2021 that is still in the account.  This amended return must be mailed, not e-filed, and you write "pursuant to..." on the top of page 1.
3. Remove $1200 from the HSA as a return of excess (the 2023 contributions). Withdraw another $475 not for medical expenses.  On your 2023 tax return, you will report the contributions (because they will be on your W-2) and you will say you removed them before the deadline.  They will be added back to your taxable income.  Then you report your HSA withdrawals from form 1099-SA.  You will be asked "did you use all the money for qualified expenses" and you will answer no.  Then you will be asked for details and you will report that $475 was non-qualified.  That amount will be assessed regular income tax plus a 20% penalty, and it will remove the excess designation from your account, so that even if you have a remaining balance (the $1200 allowable contributions minus any spending for medical costs) it is not accounted as excess and not assessed another 6% penalty.

Suppose you leave all the money in the account and you have $4000 of expenses this year, this is what will happen in chronological order.

1. File an amended 2021 return to report your change in insurance circumstances. The excess contribution will be added back to your taxable income plus a 6% penalty.  You must do this first because you need information from your 2021 return to amend your 2022 return, no matter what you plan to do.
2. File an amended 2022 return to indicate you were not qualified for HSA contributions.  Turbotax will add the $3600 back to your taxable income and assess a 6% penalty on $4075. This amended return could be e-filed. Your balance is now $5275 with $4075 considered excess.
3. For 2023 you stop your contributions but don't withdraw them.  Your balance is now $6475.  You withdraw $4000 for qualified medical expenses.  On your 2023 tax return, you will report the contributions (because they will be on your W-2) and you will say you did not remove them.  You report $4000 of qualified medical expenses. The withdrawal is not taxed.  Your remaining balance is $2475, which is all considered excess, and will be subject to a 6% penalty.

What I would suggest is likely to result in the lowest overall taxes and penalties is to start by amending 2021 reporting the excess and paying the tax and penalty.  You must do this regardless of any next steps.  Your second step would be to remove the 2022 excess and file an amended return using the write-in procedure. You also need to stop future contributions.  At that point you would have a balance of $2875 of which $1675 is excess.   (The 2021 excess, 2023 excess, and 2021 allowable amount).  I would then think about your likely medical expenses for 2023.  If they will be more than $2875, then leave the account alone and withdraw money as needed for medical expenses.  Be zeroing out the account by the end of the year, you will eliminate any future penalties.  If your expenses will be between $1675 and $2875, then remove the $1200 2023 excess as return of excess contributions, but leave the 2021 excess alone, because you will use it up.   If your expenses will be less than $1675, then you have to decide whether to withdraw $475 not for medical expenses and pay $209 in tax and penalties and be done with it, or leave it in the account and pay $29 and plan to use up the money in the future.