HSA contribution calculation on Form 8889 not generating a deduction

[tuxedorose]

doing my girfriends taxes (single filer). her W2 shows $7000 in box 12A with code W

when Turbo tax completes form 8889, I do not see this $7000 transfer as a deduction to 1040 Schedule 1.

its my understanding that the $7k was taken out of her paychecks 'after tax' .. in other words, her wages in box 1 of W2 include that $7k and thats why I was expecting to see the deduction on 1040.  

[Opus 17 · Accepted solution]

It's not a separate deduction.  Her W-2 box 1 wages should already be reduced by the amount of the HSA, so the income is already untaxed.  It can't be deducted again. 

[Opus 17]

How does she contribute $7000 if she is single?  She would have to be covered by a family HDHP that includes one or more children, who either are her dependents, or would have been her dependents except that the other parent is claiming them this year.  Maybe should she be filing as head of household?

[Opus 17]

It's completely improper for the employer to make the contributions after tax and then put the amount in box 12.  If you are sure that is what happened, the employer needs to issue a corrected W-2. 

[tuxedorose]

@Opus 17  thanks for your help.... you dont miss a thing 🙂  yes, i should have said she is filing separately (not single) . we are domestic partners and im on her company health insurance (thus family HDHP)

[tuxedorose]

yes I understand what you are saying . in fact.... im not sure if her W2 income in box 1 reflects the HSA amount or not.

2 points to clarify please...

1. I think you are saying that most likely... the $7k showing in box 12 with code W is pretax money and is NOT showing up in box 1 wages?  and thats why I shouldnt see a place in her 1040 where the $7k is shown as a deduction

2. she also has made contributions to her employer 401k plan and seperately did a Roth 401k catchup.  I can see (just using an example here) ... box 12 code AA $5000 (roth 401k) and box 12 code D $9000 (401k plan)...

is the $5k roth amount (codeAA)  also included in the  $9k 401k amount (codeD)?     

i ask because her box 1 wages is $9k less than her box 5 medicare wages. i was expecting the box1 wages to be $14k less  ($5k for the roth catch up) and $9k for 401k contributions.

thannks

[Opus 17 · Accepted solution]

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@tuxedorose wrote:

yes I understand what you are saying . in fact.... im not sure if her W2 income in box 1 reflects the HSA amount or not.

2 points to clarify please...

1. I think you are saying that most likely... the $7k showing in box 12 with code W is pretax money and is NOT showing up in box 1 wages?  and thats why I shouldnt see a place in her 1040 where the $7k is shown as a deduction

2. she also has made contributions to her employer 401k plan and seperately did a Roth 401k catchup.  I can see (just using an example here) ... box 12 code AA $5000 (roth 401k) and box 12 code D $9000 (401k plan)...

is the $5k roth amount (codeAA)  also included in the  $9k 401k amount (codeD)?     

i ask because her box 1 wages is $9k less than her box 5 medicare wages. i was expecting the box1 wages to be $14k less  ($5k for the roth catch up) and $9k for 401k contributions.

thannks

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Your GF has several complicated tax situations so it will not be easy to figure out what box 1, 3 and 5 should be.  She may want to contact HR and have them walk her through it.

1. For an employer-sponsored HSA, technically what happens is the employee enters into a salary reduction agreement with the employer and reduces her salary, and the employer contributes that amount to the HSA instead.  Therefore, the money is never included in her taxable wages, and is not subject to social security or medicare tax either.  The amount is considered an employer contribution and is only reported in box 12 code W.  It should show up on form 8889 in line 9, but not line 13 or on the 1040.  (If the employer had contributed $6000 and she paid an extra $1000 out of pocket, then the $1000 would be an additional deduction.)

2.  A traditional 401(k) is a pre-tax deduction. You pay no tax on the money when contributed, but you pay income tax on the contributions and the earnings when you withdraw in retirement.  A Roth account is after-tax.  Contributions are not tax deductible, but the earnings are not taxed on withdrawal.  If she makes contributions to both a traditional 401(k) account and a designated Roth account in the 401(k), you would get the result you describe.  Roth contributions are not subtracted from box 1 wages.

Incidentally, all retirement contributions are still subject to social security and medicare tax because they are earned income, they are just excluded from federal income tax, unlike the HSA which is excluded from all tax.

Then on top of that, she probably has imputed income due to covering you on her insurance, unless you qualify as her tax dependent.  The employer has to count the premiums that it pays for your coverage as taxable wages to her.

That leads to something that might look like this:

Nominal gross salary $100,000

$7000 HSA contribution

$9000 contribution to traditional 401(k)

$5000 contribution to designated Roth 401(k)

Pretax contributions for her medical insurance $200/month

After tax contributions for DP medical insurance $200/month

Employer share of DP medical insurance $400/month

The W-2 would be:

box 1 $86,400

box 3 $95,400

box 5 $95,400

(To make it even worse, some states don't allow pre-tax deductions for HSAs or medical insurance, so box 17 may not match any of the other figures.)

Cheers. 

[tuxedorose]

@Opus 17 Thanks for clarifying my ROth question with an example. your example makes total sense. My mistake was ,  I temporarily forgot ( a brief moment of insanity ) that Roth contribution are POST tax.   the example makes complete sense and its good to be able to do a sanity check on the W2 BOXES 1 AND 5

1. However, now its dawning on me that TT didnt ask me about the $5k that is on W2 box 12 code AA (the roth catchup contributions she made) .    does this amount have to appear anywhere on the 1040 ?  from the taxpayer perspective, since its post tax anyway, all that matters is that the $5k show up in your charles schwab ROTH IRA account i think?

2. thanks for pointing out  the imputed income regarding company provided healthcare to DP.   I thought that (espcially in state of CA) that DP has all same tax benefits as a spouse?  are you saying that if we were married, my GF would not have to pay tax on that imputed income?    

3. i can see imputed income on W2 showing as $7k (as a comment). I also see box 12 DD of $14500.    does that make sense in that if employer supposedly pays $14.5k  , than about 1/2 of that is benefiting the DP?

4. is that $7k of imputed income already in box 1 wages? im guessing it is since TT doesnt ask me anything about it

finally... i never really thought about it, but should my GF claim me as a dependent?  I can make the case that she provides more than 50% of my expenses.   in my particular case, i own a home , have investment income ..enough to itemize my deductions and pay considerable taxes (usually on roth conversion tranches). if Im claimed as a dependent on her return, how badly does impact me on mine?

Thanks! 

[Opus 17 · Accepted solution]

1. A Roth 401(k) contribution doesn't get recorded anywhere specific.  If you made more than the legal limit of all 401(k) contributions of Roth and traditional combined ($19,500 for 2020, $26,500 if over age 50) then the excess will have to be declared and removed or penalized.  I expect Turbotax picks that up automatically from box 12 but there aren't any further questions for you to be asked.

2. Under Federal tax law, DP benefits are not tax-free.  I am not knowledgable as to the full history of DP benefits, but since currently same-sex marriage is legal, there is no fairness argument to say that DP benefits should be tax-free like spousal benefits.  California might treat DP benefits differently and that would show up as a difference between your box 1 and box 17 taxable income.

Under Federal law, anything of value that the employer provides to the employee in return for their services is considered part of their taxable income, unless it falls under a protected category of tax-free fringe benefits.  Health insurance is one of these benefits, provided the employer follows certain rules.  The employee can pay their share of the premiums pre-tax -- and the employer does not have to include the value of employer-paid premium in the employee's wages -- for any plan that covers the employee, legal spouse, or dependents.  If the employer offers coverage to any person who is not a spouse or dependent (including a RDP), the employee share of the premium is deducted after tax, and the employer-paid share of the premium must be added to the employee's wages.  There was formerly a fairness argument about benefits for same-sex partners, but that was superseded by the legalization of same-sex marriage.  Because you could marry your partner (regardless of sex, gender or orientation) there is no fairness argument to extend special tax treatment to benefits for unmarried people.  

So yes, if you were married, the employer share of the premiums would not be added to your GF's Federal (box 1) taxable income.

3. That sounds about right.

4. The imputed income should have automatically been included in the box 1, box 3 and box 3 taxable wages by the employer and is subject to federal income tax, social security tax and medicare tax.  (Whether it should be included in box 17 state wages would depend on state law.)  

5. As an adult not related by blood or marriage, you can't be claimed as a dependent if you have more than $4200 (for 2019) of taxable income, regardless of the amount of support provided by someone else or who you live with.  

[tuxedorose]

@Opus 17 thanks for your quick responses.

1. interesting.. i see that the only diff between box 1 wages and box 16 Cal wages is the amount of the HSA . I guess that means california doesnt recognize that 'off the top' deduction since it is added back in

2. DP benefits.  in our case its not a same sex DP (not that theres anything wrong with that ( sienfeld reference anyone? 🙂  but I see your point, marriage is an option if you dont want to be penalized for this imputed income.

just to be clear... on her W2 under the YTD deductions.. i see $14500 for reportable heathcare coverage. I believe those are her paycheck deduction which I think are post tax.  I then see $7000 as imputed income, which is confusing because it looks like about 50% of the first amount.... BUT... I think you are saying that the $7000 is what the EMPLOYER paid for MY share of the coverage... is that right?

5. when you say max taxable income for an adult dependant cant be more than $4200 , you mean any taxable income... not just earned income... is that right?   if so , i clearly dont qualify

W2 reconcile

its very hard to pin point how that box 1 ,3,5 income is calculated.   when i add up all the YTD earnings (which includes a bunch of stuff including the imputed income of $7k).... the total is higher than the box 1 amount by the sum of the 401k contributions PLUS the imputed income....    so it appears (unless im missing another 7k amount for something else) that she is not going to pay tax on the imputed amt ?

Thanks!

[Opus 17 · Accepted solution]

1. Correct, California does not allow a pre-tax deduction for HSA contributions. 

2. Code DD should be reporting the total value of health insurance coverage.  It should include all of:

1. Employee pre-tax premium for self and dependents
2. Employer paid insurance for employee and dependents (excluded from taxable income)
3. Employee after-tax premium share for DP
4. Employer paid premium share for DP (included in taxable income as imputed income).

Code DD has no direct effect on the employee's tax return, it is there for reporting reasons related to the ACA.  The amount is made up from several different parts with different tax effects, if it is unclear how each part relates to a pay stub or W-2, you may need to ask the employer to sit down with your GF and go over it in detail. 

If code DD is $14,500 (total cost of coverage), and the imputed income (value of DP coverage paid by employer) is $7,000, then I would guess the value of employee coverage paid by the employer is also $7,000 and the other $500 are your GF's share of the premiums paid by payroll deduction (some of which may have been pre-tax and some after-tax). 

More info on code DD is here. https://www.irs.gov/affordable-care-act/form-w-2-reporting-of-employer-sponsored-health-coverage

5. Any taxable income.  You can't be claimed as a dependent. 

Reconciling a W-2 with a pay stub can be difficult in complicated tax situations.  I'm not sure how much more practical help I can be, your GF may need to talk to someone in her payroll department.

I would start by comparing box 1 and 5.  They should only be different by the amount of pre-tax retirement contributions.  Then, box 5 should be her gross wages, minus her other pre-tax deductions including health insurance premiums, HSA contribution, and maybe a few other things, plus the imputed income for the employer-paid DP insurance.  

You could also look at any single paycheck, and divide the Medicare tax amount by 1.45%.  (As long as she is not subject to the additional 0.9% medicare tax over $200,000 income). That should equal her taxable wages for that check.  (For example, if Medicare tax was $72.50, her taxable wages for that pay period were $5,000.)   That taxable wage amount for that pay period should be her gross wages, minus pre-tax deductions, plus that period's imputed income.  (If $7000 per year, then $583.33 per month, or $291.67 if paid semi-monthly, or $269.23 biweekly, and so on.)

[tuxedorose]

thanks @Opus 17 . your answers are very helpful and informative!