Your 2018 tax return must also include Form 5329 Part VII to calculate and pay the 6%, $414 excess contribution penalty for 2018.
I did make the contribution personally
I did not yet do my 2018 taxes. So it seems pretty unfair that if I obtained no economic benefit by putting the money into the HSA that I should have to pay a penalty. I agree that if I took the 2018 deduction, there should be a penalty to withdraw, but I owe penalty even if I don't take the deduction? Do i owe the penalty if I do not take the deduction and just leave it in there? If so that seems logically crazy. There is not benefit to me from taking money from a savings, to an HSA and getting no tax benefit and only limiting myself to what I can spend it on and then paying a 6% penalty. I understand I would owe income tax on any gains. unless the penalty is just there to give be incentive to be more careful.
As for correcting the $6,900 excess contribution, because you've already made a $7,000 contribution for 2017 it's not clear if you are permitted to apply the $6,900 carried into the 2019 tax year as part of your 2019 contribution so that you can treat $6,900 of your $7,000 contributed for 2019 as an excess contribution for 2019 and obtain a $6,900 explicit return of excess contribution before the due date of your 2019 tax return (not a regular distribution); only actual excess contributions for the current tax year are permitted to be returned this way.
In response to this, when I logged in to create the HSA account in January of 2019, the default box was 2018, so i deposited it in 2018, thinking it was 2019. Later realizing I did not deposit it for 2019, I again deposited the $7000 max money with the box checked for 2019. Lively says the follwing underlined section:
Since the tax deadline for 2018 has passed, your 2018 full contribution of $6900 has been reported in our tax reporting for the 2018 tax year.
As such, from here we can issue an excess contribution withdrawal for $6900 to reverse the funds back to your bank account. This excess contribution withdrawal will be reported associated with the current tax year of 2019.
So i do not think that I can just change the january 6900 deposit and rename it to 2019, then remove 6900 for 2019 as excess because it has already been reported for 2018. But if I could that would be great.
The alternative that would certainly be acceptable to the IRS would be to simply take a regular taxable (not claimed as applied to medical expenses) distribution of $6,900 which would resolve the excess carried in from 2018 but would on your 2019 tax return be subject to ordinary income tax and a 20% early-distribution penalty on top of that if you are under age 65 (which is likely for someone presently making HSA contributions) ... very expensive. A return of contribution would instead only require that the $6,900 be accompanied by the associated investment gains on the $7,000 contribution and only the distributed gains would be subject to income tax. (Of course you would also not receive any deduction on your 2019 tax return for the portion of the 2019 contribution returned.)
Paying 20% seems like a waste of money. and i want the deduction for 2019.
when you say i"t's not clear if you are permitted to apply the $6,900 carried into the 2019 tax year as part of your 2019 contribution" how can i make it clear? i called the IRS and they don't take phone calls.
