Turbo Tax's handling of the 1099-SA distribution code 2 (HSA excessive contribution withdrawal) is causing me confusion!

[siebertclan]

I had an HSA excessive contribution that Turbo Tax caught on my 2016 tax return.  So, this year, I got a 1099-SA with a code 1 for my normal distribution amount and I also got a 1099-SA with a code 2 for the excess contribution withdrawal.  I entered both 1099-SA amounts in separately into Turbo Tax when it asks for 1099-SA amounts.  So a few steps later it asks me if I had any HSA excess contributions in the previous years.  Why did Turbo Tax not catch that I obviously did, being that I entered my 1099-SA amount in with that code 2 into Turbo Tax just a few steps earlier?  By me putting in that 1099-SA code 2 amount on one of my HSA 1099 entries, you'd think when it comes to the end of that section it would have that code 2 amount in as "Excess Employer Contributions Withdrawn", but it does NOT.  That amount shows as ZERO.  ??!!  By me inputting a 1099-SA with a code 2, that amount should automatically pull through on the other steps. I have no idea what the correct thing to do here is.  Turbo Tax did add it to my 1040 line 21 on my 2016 taxes.  And I did withdraw it by 4/15/17.  So that is covered.  I just don't know for sure if TT is doing it correctly this year because it sure doesn't look right to me.

[BMcCalpin · Accepted solution]

When TurboTax is asking you if you "overfunded" (had excess contributions to) your HSA in a previous tax year, it only wants to know if you made excess contributions and CARRIED THEM OVER to this tax year.

When you withdrew the excess for the previous tax year early in the current tax year, you "cured" the excess contributions for the previous tax year, and therefore should enter zero (or just leave blank) the entry for overfunding from the previous tax year to the current tax year.

The purpose of the 1099-SA with the code of '2' is to report on the earnings that the excess contributions earned while they were in the shield of the HSA. These earnings will be added to Other Income in the current tax year, while, as you noted, the withdrawn excess contributions were added to Other Income in the previous tax year.

[Edited 3/10/2020 4:20 pm CDT - made year-neutral]

[siebertclan]

Turbo Tax instructions should really add more of an explanation that is somewhat similar to how you worded your answer to my question.  I get frustrated with Turbo Tax because I feel if I use this same tax software year after year, it should "know" more from my past tax returns? (i.e.   Why didn't this 2017 TT pick up from my 2016 TT info transfer that I had already taken care of my 2016 HSA excessive contribution withdrawal?)

[wepucketts]

I agree the instructions need clarified.  I had a slightly different but related question about return of excess HSA contributions that has taken hours and hours to try to clear up.  If you're interested, see the discussion at the question: How can I enter a nonqualified hsa withdrawal in TT Premier?

[siebertclan]

Thanks!

[87dlh87]

My HSA was over-contributed by accident in 2019 and I paid income tax on the over-contributed amount.  However, I did not realize I would continue a penalty until the excess was withdrawn.  Withdrawal done in 2021.  Form 8889-T will not fill out properly to calculate just the 20% penalty so a TTax rep said to override the calculations on form 8889-T, pay income tax again on the amount of the over-contribution and then the calculation of the 20% penalty shows on the 8889-T form.  I'm not happy to pay tax on an amount I already paid but it's not a lot.  However, TurboTax (Desktop) now says I can't e-file because  of the override on the form??  Can this be fixed??