HSA contributions

[whayle]

Employer contributions were taxed in 2022, and were subsequently withdrawn.  TurboTax 2023 asks for the  amount reported on 2022 Form 8889, which was the amount included in income in 2022.  As soon as that amount was added, 2023 tax increased.  How do I avoid double taxation by the federal government?

Because the the taxpayer had the HSA only for the last month of 2022, and did not have an HSA for all of 2023, TurboTax 2023 includes in income a portion of that contribution, resulting in triple taxation of the employer contribution.   

What have I missed that would have avoided 2023 federal taxation of the amount included in 2022 income.

Thanks for your help.

[BillM223]

Let me explain what you are seeing:

"Employer contributions were taxed in 2022, and were subsequently withdrawn." TurboTax told you that you had excess HSA contributions, and you withdrew them per the instructions. The excess was added to your Other Income, and you withdrew the excess to avoid a 6% penalty on the excess carryover to next year.

"TurboTax 2023 asks for the  amount reported on 2022 Form 8889, which was the amount included in income in 2022." No, it didn't; it asked for the amount on line 48 on your 2022 form 5329. And since you withdrew the excess in early 2023, there shouldn't be an amount on line 48, so no double taxation.

"As soon as that amount was added, 2023 tax increased." Sure it did, because you shouldn't have entered anything. Please go back and read that input screen carefully.

And if you indeed had an amount on line 48 on the 5329, come back and tell us, because this doesn't match what you told us up above.

[whayle]

Thanks for responding to my question.  I'm working with TurboTax 2023's screen entitled How Much Did H*** contribute to an HSA in 2022.  The first line under the heading asks for total contributions (Form 8889, line 2 + 9), with the note that it includes amounts contributed by the employer on behalf of H.  I entered that amount and the tax liability for 2023 was increased accordingly.  That amount was reported on the 2022 W-2 and included in 2022 income.  The second line asks for the excess contributions, line 47 of Form 5329; that form wasn't filed in 2022, but I had entered 0 because of the withdrawal; 0 was also entered in the the third line, Deduction Allocated to Spouse.   There wasn't any instruction to exclude what was taxed in 2022.  

Because H had an HSA in 2022 only in December and only for half of 2023, the end of year rule applies.  Accordingly, the excess which had been withdrawn is being included in income and therefore subject to tax to tax.  

What do you suggest?  Thanks again for your help.

[BillM223]

OK, I did not realize that you had wandered off into the last-month rule processing, so ignore what I said before.

What that section is doing is this:

1. The last-month rule states that you are allowed to use the full annual HSA contribution limit no matter how few months you had HDHP coverage, so long as you had HDHP coverage the first day of December.

2. The catch is that you have to stay under HDHP coverage for the next year, or else your previous year return get recalculated. This is called "Failure to Maintain HDHP Coverage".

3. The recalculation consists of figuring out what your annual HSA contribution limit would have been had you not used the last-month rule.

4. So TurboTax wants to know how many months you had what kind of HDHP coverage, and what kind of HSA contributions you made (all in 2022), so it can recalculate the excess, if any.

5. I say, "if any", because it's possible that you did not contribute too much even without the last-month rule. In this case, there is no extra tax.

6. But if you contributed too much without the last month rule, then look at Part III on form 8889, this is where the penalty is put.

Line 18 is the excess that you would have had had you not used the last-month rule. This money was excluded from income in 2022, so it's not double-taxing it to put it here.

Line 21 multiplies the amount in 18 and 19 (we are ignoring line 19 here) by 10% - this is the penalty for failure to maintain HDHP coverage. But, again, no double taxation.

And please don't watch the Refund Meter too closely; things are happening out of sync with what you are entering. Let's get to the end and see if anything has really been double taxed.