HSA contribution caused an increase in my tax owed?

[jesart2]

I added another $500.00 contribution to my HSA in April 2017 for 2016 and it caused my tax owed to increase instead of decrease

[BMcCalpin · Accepted solution]

As you realize, the additional HSA contribution should not increase your taxes due.

Note, however, that when you initially enter contributions such as on the W-2, that the IRS considers these contributions to be taxable, until there is a completed 8889.

The 8889 is the report that determines the annual contribution limit, and whether the contributions and distributions are tax-free or not.

But until you complete the HSA interview (that is, go all the way until you are returned to Your Tax Breaks), the 8889 is not complete.

This is why it's not a good idea to pay too close attention to the tax due, because sometimes TurboTax has to delay making a calculation until several screens have passed.

Complete the HSA interview and see if the extra contribution is rendered tax-free.

[rwells9444]

I added a normal distribution and my Fed tax increased and remained higher for the completion of the federal tax final review.  Why is a HSA normal distribution taxed?

[Va18]

I’m having the same problem, but I completed all forms and the entire return and the tax still went up after I entered the HSA contributions. Why?? Moreover, I played around with the numbers to see what would have happened if I had given closer to the annual limit, my tax owed TRIPLED(!) Why?? Everything says it lowers your taxable income. 

[BillM223]

Did you have excess contributions? How were the HSA contributions made? Through your employer or directly to the HSA custodian?

One often confusing thing is that the HSA contributions through payroll deduction (which are reported in box 12 with a code of W on your W-2) are removed from Wages in boxes 1, 3, and 5. This is the tax benefit - the contributions are never in your income. This is why the code W amount doesn't appear as a deduction anywhere, it doesn't need to. Does this describe your situation?

@Va18

[Va18]

No, there were no excess contributions. They were made with after-tax dollars directly from our bank account because our employers don't offer HSA's. I've gone over it and over it and I swear I've entered everything correctly in the software. When I enter mine, the tax owed drops, but then I enter my spouse's and it goes up. I called customer support and they said I'd need to upgrade to speak with a CPA but I don't think it's really a tax problem. I think it's a software problem. While I was on hold for customer support, I played around with the numbers to see what would have happened if we'd given more - still not maxing out though - and the tax owed TRIPLED. This just isn't correct.  I've had enough frustration from doing it over and over on Turbotax trying to make it work, so I've hired a competent CPA I know t to do my return. 

[BillM223]

Unfortunately, we in the Community cannot see your private tax data, so I can't see what's going on. But there is no error that I am aware of in how TurboTax calculates the deduction for the HSA contributions.

There are things that interact on the tax return that you might never expect, but because there are so many, I can scarcely ask you all of them. Your direct HSA contributions appear on line 13 on Schedule 1 (1040). This entry has the effect of reducing your adjusted gross income (AGI). Some of your other deductions or credits may be reduced by adjustments to your AGI. There is no way to know which, unless you look at every line on the 1040 and its three schedules to see what changes, besides line 13 (Sch 1). 

If you want to know what is happening, this is what you need to do.

[Va18]

All I know is I answered all the questions on Turbotax correctly throughout the interview and it didn't give me correct results. I hired a CPA and he managed to do it correctly. It says you're an "employee tax expert" so naturally you're going to defend the product. I appreciate your trying to help. I've moved on - I'm done with Turbotax. It's great until it there's a problem, and then you can't get any helpful help. When I called they suggested I try itemizing. You don't have to itemize to get the reduced taxable income benefit. 

[sharonlu]

I was having the same issue. My contribution through my employer was $1250. When I went to add my personal contribution of $1000, my taxes due went UP $40, but once I marked the months that I had a high deductible health insurance, plan, it went back down.

[BillM223]

"When I went to add my personal contribution of $1000, my taxes due went UP $40, but once I marked the months that I had a high deductible health insurance, plan, it went back down."

Yes, this is how it works, if you are making "employer contribution" (i.e., code W in box 12 on your W-2. The reason is that the IRS does not consider HSA contributions to be deductible until you have shown that you have the proper HDHP coverage, so the code W amount is added to Other Income on line 8 on Schedule 1 (1040). 

Why? Because before your W-2 was printed, your employer removed the code W amount from Wages in boxes 1, 3, and 5 - this is how such contributions are a tax benefit, because you are never taxed on them at all.

However, sharonlu, you said that you made a personal contribution, and your tax went up. In this case, on the immediate screen where you entered the personal contribution, your tax due went up because it was considered an excess contribution that was to be carried over to the next year, so the "excess" is taxed at 6%. This is how much your tax went up.

However, as soon as you entered your HDHP information, your tax went back down, because the 6% tax penalty was removed.

This is why we encourage taxpayers NOT to watch the Refund Meter too closely, because there are things that are happening behind the scenes that affect the Meter out of sync of what you are entering. This is likely what happened to Va18.

As I noted above, TurboTax is handling the HSA contributions correctly, if you would just go all the way through the HSA interview.

@sharonlu

@Va18