Do I need to claim inherited HSA distribution on my taxes? If so, how should I respond to TurboTax online prompts to correctly claim this income?

[stwatson]

I have a 1099-SA with numbers only in boxes 1 (gross distribution) and 4 (FMV on date of death). However TurboTax online fails to import a photo of this form and there appears to be no way to manually enter it. When I specifically navigate to HSA section through the help menu... I'm not sure whether to claim that I paid for anything with the HSA. If I say no, there is a question about whether the HSA is inherited. When I answer yes, I'm taken to a question about "qualified medical expenses" and "the value of the HSA on Dec 31, 2024" without referencing box numbers. I expect it's on me to find out if my deceased had qualified medical expenses. However, the value of the account on Dec 31 was $0 because it was all distributed by then, but then on the summary page for HSA task it looks like there was no HSA income which doesn't seem correct since a google search shows that inherited HSA income is taxable. So do I put box 1 or box 4 info in the "HSA Account Value" text box....? I appreciate your help! I think the inherited HSA path through TurboTax online could use some revision.

[DavidD66]

If you aren't the deceased's spouse, when you inherit an HSA the value of that HSA at the owner’s death is taxable income that year.  You can offset this tax liability by paying the deceased’s medical bills within a year of death.  You are not taxed on any inherited HSA money you use to pay the deceased medical bills, as long as you do it within 12 months.  If you didn't/don't pay the medical expenses of the deceased, your inherited HSA is taxable.  The taxable amount would be the amount in Box 1, that should have been distributed to you.  

The fact that the Health Savings Account did not earn any income is not unusual.  Many, if not most employer HSA plans do not pay any interest and offer no investment options for the funds in the HSA.   

• When you enter your Form 1099-SA, answer the question "Did you spend your HSA money on medical expenses only, answer "No, I didn't." and then indicate you didn't spend any of it on medical expenses.  
• After entering that question, you'll land on the "Here's what we have so far" screen.  Click on Done
• Next screen should be "Now let's work on [your] HSA"  click on Continue
• Answer "Yes" when asked if you inherited the HSA
• If you didn't pay any medical bills for the deceased, enter zero, and enter zero for the HSA account value on December 31, 2024.
• Answer No, when asked if you put money in an HSA
• Answer the Medicare question
• For "Report Death or Disability Exception" enter the total amount of your HSA distribution
• The amount you received from your inherited HSA will appear as taxable income on Schedule I of Form 1040 on line 8.f.

[stwatson]

Thank you for your detailed answer David! I entered zero for both medical bills and value on Dec 31 as you instructed. However, after the Medicare question I don't see the "Report Death or Disability Exception" question, instead I see "Was [name] covered by a High Deductible Health Plan (HDHP) in 2024?". I answer No and then I see "Did you overfund your HSA in 2023?". I answer No and then I'm taken to the summary page with no more questions.  Is there something else I could be doing to miss seeing the "Report Death or Disability Exception" question?

[BillM223]

There is no "Death or Disability Exception" in the HSA interview, which explains why you can't find it. 

When you enter the 1099-SA, when you do the pulldown menu for box 3, you will see there is a Disability code and two Death codes.

However, these are based on the code that you should see in box 3; it's not a separate question.

I wonder if David was thinking of something else like an exception to the early distribution penalty. 

Well, no matter, if you follow his instructions (except for the missing "Death and Disability" thing), you should be fine.

[stwatson · Accepted solution]

Thank you Bill!  I wish I had the desktop version now, it looks like it would be much more straightforward to enter my info.

Working on this today... I ended up finding an answer to a different question that helped me (link below): "... enter the correct FMV on the date of death (yes, it says FMV at the end of the year, but it should be the date of death)." So even though the account was empty at the end of the year I filled out my box 1 amount to that FMV-end-of-year question and checked how TurboTax online filled out Form 8889. My inherited HSA distribution ended up getting populated on Form 8889 lines 14a, 14c, and 16. Zeros everywhere else, but checkbox 17a was checked that I didn't need to pay a 20% tax penalty because of an exception. I looked up the 8889 instructions and verified that death of account holder is a valid exception. So I'm satisfied that my federal is filled out correctly and moving on to state questions. Thanks for responding!

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/i-m-checking-my-entries-and-this...