Bug in Software? HSA Qualified Funding Distribution Not Recognized on Massachusetts Return

[GWR081]

I have a HSA qualified funding distribution for 2022 which was correctly included by Turbotax in my Federal return but it did not carry over to my Massachusetts return.  Massachusetts adopted the Federal provision for HSA qualified funding distributions (one-time rollovers from IRAs to HSAs) for years beginning after December 31, 2006.  As a work around, Turbotax does allow you to override the taxable income from an IRA for the Massachusetts return.  In order to to do this, you need to go into Forms and select the Schedule X worksheet.  There you can override any of the amounts displayed in blue with the correct amount of taxable income.     

[BillM223]

Yes, you will need to do a workaround. However, the MA DOR suggests that the workaround should be to open Schedule Y and enter the HFD amount on line 8. 

That is, the total of IRA distributions should appear on Schedule X, line 2, and the HFD amount (the part of the IRA transfer sent to the HSA) should appear on line 8, Schedule Y.

No matter how you do the workaround (the suggestion above can be used to achieve the same result on Schedule X), be sure to document what you did and keep it in your tax files, in case anyone ever asks.

[GWR081]

Hi Bill,

Thank you for your response.  The suggestion from the MA DOR is interesting.  Mass.gov states that Massachusetts has adopted the Federal provisions for HFD's.  So the suggestion to enter the HFD on line 8 of Schedule Y seems to conflict with Federal tax rules which do not allow a deduction for an HFD.    Also, Schedule X, line 2, asks for taxable IRA distributions.  It seems that amount should agree to the taxable IRA distributions shown on Federal Form 1040, line 4b.

As you point out, both approaches have the same end result.  I'm going to stay with my approach which is to follow the Federal tax provisions for HFD's as I feel confident I can support that based on the disclosures on the mass.gov website.      

[BillM223]

Massachusetts is going to have to rewrite some instructions one way or the other. Their instructions for line 2 on Schedule X are to include all distributions from IRAs. Their instructions for Schedule Y are to enter HSA contributions which are direct (not through an employer). If you think about it, this is exactly what TurboTax is doing. One way or the other, the MA DOR will have to update their instructions, and then TurboTax can follow suit.

[GWR081]

I don't quite follow your latest response.  On page 20 of the instructions for Massachusetts Form 1 it indicates that line 2 of Schedule X should include the taxable portion of the amount received from an IRA.  Turbotax did not do this correctly as it also included the HFD which is not taxable.  As a result I had to override Turbotax to get to the correct taxable amount of my IRA distribution.  On page 21 of the instructions for Massachusetts Form 1 it states that the amount for line 8 of Schedule Y needs to come from U.S. Federal Form 1040, Schedule 1, Line 13.  This amount comes from Federal Form 8889 which backs out the HFD to get to the total HSA deduction. Turbotax did all of this part correctly.   So its seems to me Turbotax does still need to be fixed because it is overstating the amount of taxable income in this situation unless the user does an override.  Perhaps you were looking at different pages in the instructions that conflict with the pages I referenced above?    

[BillM223]

Please look at page 20 of the MA Instructions for the Schedule X instructions. It says, "Complete the Schedule X, Line 2 Worksheet to calculate the taxable portion of any amount you received from an Individual Retirement Account (IRA), Keogh, qualified charitable IRA distribution or Roth IRA conversion distribution." Looking at it one way, it would make sense to not include the HFD here because it is not taxable in MA.

However, in looking at the Schedule X Line 2 worksheet (top of center column), the instructions for line 1 of the worksheet says, "Total IRA/Keogh plan distributions, qualified charitable IRA distributions, Roth IRA conversion distributions received during 2022". It says, "total", not "taxable". The taxable amount is calculated from the worksheet, and the worksheet starts with the total IRA distributions. So the result of the worksheet is logically the total IRA distributions, not the taxable amount, not matter what it says elsewhere.

As you can see, HFDs are not mentioned anywhere. MA has an issue with its documentation. We all agree that HFDs are not taxable in MA, the issue is how to report it. The MA DOR told me to report the HFD amount on Schedule Y. Of course, the instructions for Schedule Y don't mention HFDs either.

If you are disputing my statement that TurboTax is doing what the MA instructions literally said, I stand by that statement. The problem is not TurboTax, it is that the MA instructions are deficient.

If you do your return by adjusting Schedule X, you get a good result. If you do it the way that the MA DOR said, you also get a good result by adjusting Schedule Y. I imagine that both methods will be accepted by the state for the time being (until such point as they update their documentation).

In either case, I congratulate you for understanding your tax return well enough that you caught this and pointed it out to us.

[GWR081]

I looked at the page 20 instructions and the first sentence reads "Complete the Schedule X, Line 2 Worksheet to calculate the taxable portion of any amount you received from an Individual Retirement Account ...".  Also the last line of the worksheet reads "Taxable IRA/Keogh distributions or Roth IRA conversion distributions".  

I think we need to look at the big picture here.   It seems pretty clear that their intent is to have taxable amounts included on line 2 of Schedule X.  I do agree that their instructions could benefit from some clarity regarding how to handle HFD's.  However, based on the instructions, I don't think Turbotax should be including nontaxable IRA distributions on line 2 of Schedule X as that is clearly not the intent here.

Also, I think the instructions for line 8 of Schedule Y are very clear.  Just enter the amount from your Federal return. The Federal return is clear on the handling of an HFD.   I don't think Mass.gov will change that nor do I feel it is even necessary.  Plus this is not an issue for Turbotax.     

I hope you can provide this feedback to Turbotax so they can make some changes that will result in the correct taxable income for Mass. being calculated in this situation.  It's just common sense that it is not ok for tax software to make errors in computing someone's taxes, and hopefully they will own up to that and make the necessary corrections.  Also, it might make sense for Turbotax to build in some checks and balances between taxable IRA distributions on the Federal return and the Mass. return.  It already has a lot of these types of checks built into the software for other areas which are very good, so maybe they will add this one in too? 

This tax error in Turbotax does not appear to be an isolated occurrence based on all the postings (including my other postings) about errors.  Turbotax is not perfect, but hopefully with all the feedback from he community steps can be taken to make it a better product.  Thank you for your consideration.