Being claimed as dependent with HSA contributions, stuck at 8889-T Form line 3

[IndyCat]

So in completing tax return for 24 year old daughter who is claimed dependent on her parents return and was covered under parents HDHP plan as a student during first 7 months of year.  She  left home and was employed after graduating and enrolled in a HDHP HSA health plan during the last 5 months of the 2023 where she was also taken off her parents HDHP plan.  She must fill out form 8889 as she had distributions used with her HSA towards eligible medical expenses and also contributed monies towards the plan with payroll deduction.  Question 1 to indicate coverage under a high-deductible health plan (HDHP) during 2023 is answered as "Self-only" checked.  Line 2 we added the amount she had contributed for HSA during 2023 which also was shown on W2 Box 12c Code W.  So per IRS rules with HSA, if you are claimed dependent by another you cannot contribute tax free to an HSA such she will now pay taxes on her contributions as they were income.  All is okay with this except Turbo tax will not allow us to accurately complete Line 3 Smart Worksheet for January to December as it only accepts "None" ( which is directed towards individuals covered b y Medicare).  We believe she should answer Line 3 Smart Worksheet Lines 8-12 as "SELF Only".  Once Smartsheet is filled None for all months, error is cleared and return may be filed.  Any ideas on how to resolve this with honest filing?

[BillM223 · Accepted solution]

"So per IRS rules with HSA, if you are claimed dependent by another you cannot contribute tax free to an HSA "

No, per the IRS rules, if you CAN be claimed as a dependent, then you are not eligible to contribute to an HSA, whether or not you are actually claimed as dependent. Note this works both ways - some people claim someone as a dependent, even when they are not eligible to.

You should review the rules for being a dependent starting on page 26 of IRS Pub 17. Note that your offspring must qualify as either a qualifying child or as a qualifying relative.

""None" ( which is directed towards individuals covered by Medicare)"

None means every time it is used in the HSA interview, that you do not have HDHP coverage without conflicting coverage. So it could mean no HDHP coverage, or HDHP coverage with a conflict like Medicare or a regular health policy (not HDHP), or HDHP coverage when you can be claimed a a dependent.

In the HSA interview, when your daughter gets to the first question of "Was [name] covered by a High Deductible Health Plan (HDHP) in 2023", she should check, "No, I did not have coverage." Never mind that she did have HDHP coverage, for tax purposes she did not because your ability to claim her as a dependent.

Then, in the Review, most of the objections should disappear, except for Line 1, where you can enter Self (it won't matter because all the months got set to NONE when she said that she did not have HDHP coverage.

Try this out and see how it works.

[IndyCat]

Thanks for your prompt reply.  So thanks for clarifying the IRS rules with Pub 17. Daughter is definitely a dependent per Table 3-1 p 27 for. 2023 tax purposes.  Sounds like she should not have participated in the HDHP for tax purposes.  We did include the amount she wrongly contributed on Schedule 1 Line 8f (Income from Form 8889) so she paid taxes back on it as it was pre-tax dollars.  So even with checking the box "No, I did not have HDHP coverage for 2023", and also answering Self Only on Form 8889-T Line 1, it had not checked any of the None boxes for us for the year so we selected those for all 12 months to clear the Error.  Also, we had to correct the 8889-T form, as somehow through our own entry of amount she contributed to HSA and what was on W2, it had double the amount. It would have been nice to avoid this form altogether with all the confusion yet seems necessary with filing. 

Also, with us changing answers in the interview on this,  an additional 8889-S form kept being added.  This was easy enough to delete with no entries actually on the form.  Next tax year 2024 will be easier with the HSA as at 25 and living entire year on her own, she will claim herself as dependent and properly contribute to HSA pre-tax with participation in HDHP.