I have a 1099-SA showing a gross distribution which should be taxed, but Turbo tax does not ask if it was spent on medical expenses, and assumes it was. How do I correct?

[Jc1bender]

I see the error in TT form 8889 line 14b, how can I correct it?

[LeticiaF1]

No, you will need to correct your entries by going back to the section in TurboTax  to review your entries.  Open or continue your return in TurboTax.

1. Select Search and enter 1099-SA.
2. Select Jump to 1099-sa.
3. Answer the questions and continue through the screens.
4. After you enter your 1099-SA, we'll ask Did you spend all the money you took out on medical expenses?
5. This is where you need to say NO 

You will need to enter the amount that was not used to pay for qualified medical expenses.  This amount will  become taxable income and will be reported on Form 8889, line 16 and Schedule 1, line 8. The program will calculate the additional 20% penalty that will be reported on line 17b of your 8889 and Schedule 2, line 8.

[Jc1bender]

That does not seem to work.  I received 2 1099-SA forms on the same HSA account.  The one that was for a medical expense asks the question Did you spend all the money you took out on medical expenses?  But the other, with a distribution code of "2" does not ask the question.  Code 2 is Excess contributions.  Late in 2022 I started medicare and my contributions for the previous 6 months were refunded to me in 2023 with a code of 2.  The HSA company said I would simply be taxed on it as income in 2023.  But Turbo Tax does not ask the question if it was used for medical expenses, I suspect because of the distribution code 2.  I seem stuck.  Thank you for your help, much appreciated.

[BillM223]

Don't worry, you are not stuck.

When you are in the HSA interview and an excess in contributions is detected, then the excess is immediately and automatically added back to Other Income if the contributions that were in excess were from the code W amount , i.e., "employer contributions". These are not necessarily from the employer but are added to your contributions by means of payroll deduction - the reason they are called "employer contributions" is because they are treated the same way. The code W amount is removed from Wages in boxes 1, 3, and 5 before the W-2 is printed, hence the employer contributions in excess must be added back to income.

OK, so the 1099-SA with a distribution code of 2 in box 3 doesn't need to add the excess to income, because it already got done. The only income that this 1099-SA adds to your income is the earnings in box 2.

So on the 1099-SA:

1. Box 1 excess amount

2. Box 2 earnings amount

3. Box 3 distribution code

When box 3 is '2', then box 2 is added to income, and box 1 is ignored.

When box 3 is '1', then box2 is normally empty (and ignored anyway), and box 1 is added to income IF YOU SAY THAT IT WAS NOT FOR QUALIFIED MEDICAL EXPENSES. Of course, it is usually for qualified medical expenses, so the box 1 amount is transferred to the appropriate line on the 8889.

Does this work for you?

[Jc1bender]

Thank you for the response, but I don't think it quite applies.   I started Medicare late in 2022 and Fidelity, the company responsible for holding the HSA had to return 6 months of my previous contributions.  Those funds were returned in 2023.  Fidelity told me it had no effect on my 2022 taxes, and when I did my 2023 taxes I would report the contributions, which they would report to me in my 2023 1099-SA as 2023 income and I would pay tax on that money in my 2023 taxes.  Because I started  Medicare in 2022 there is no code W amount on my 2023 W-2 as my employer made no contribution.  And when I remove the 1099-SA from my 2023 turbo tax, it still shows exactly the same amount of taxes due.  And when I look at the form 8889 which TurboTax generates in line 14b it shows this as a distribution which I rolled over to another HSA, which I did not.  I am on the verge of giving up on TurboTax and hiring a professional. I will apply for an extension to buy time.  So my 1099-SA Gross Distribution was not taxed in 2022 and needs to be taxed in 2023, which TurboTax is not doing.  Even though 1099-SA box 3 has distribution code 2 (excess contributions), it was not taxed in 2022, and needs to be taxed in 2023, which you indicate TurboTax will not do.  Any further thoughts?

Thanks

[BillM223]

One of the difficulties of discussing an HSA is that the events take place over the course of two or occasionally three calendar years, and we often don't know which years you are referring to.

So let's try from the top:

1. You went on Medicare in late 2022. I assume that this was July or later. If you already over 65, then the SSA backdates the Medicare start date to 6 months earlier or your 65th birthday, whichever was later.

2. It sounds like you asked for the withdrawal of excess contributions for 2022, and Fidelity sent the excess to you plus some earnings on the excess. 

3. "Fidelity told me it had no effect on my 2022 taxes," - It is true that the 1099-SA had no effect on your 2022 taxes, but TurboTax automatically added the amount of 2022 excess to your Other Income. This is why the 1099-SA doesn't work the way you think it should work.

4. "when I did my 2023 taxes I would report the contributions, which they would report to me in my 2023 1099-SA as 2023 income and I would pay tax on that money in my 2023 taxes. " You will enter the 1099-SA on your 2023 return, but since TurboTax already added the excess contributions to your 2022 return, it won't do it again for 2023 (the distribution code of '2' causes TurboTax to ignore the contents of box 1 (the excess) for 2023). Only the earnings in box 2 will be added to Other Income for 2023. So it appears that Fidelity about this.

5. Line 14B is not only HSA rollovers, but also excess withdrawn before the due date of the return. This is where the time issue becomes a real problem. I am thinking that this is the excess for 2022, but the eclipse is coming ;-)...

OK, note that the 1099-SA does NOT add income except for earnings the year after. So it sounds like a number of your concerns are mislaid.

TurboTax actually does nearly all HSA things correctly, but since the taxpayers don't understand what it is suppose to be doing, they are full of unwarranted concerns that TurboTax is not operating correctly. Instead, please do what you are doing and come back and ask us on specifics, and I imagine that you'll find that everything is OK.

[Jc1bender]

Thank you for the time you have put into this, it is much appreciated, but I believe that the problem still persists.  I have have put in for a filing extension and anyway this turns out I will be fully paid up, so I have bought some time.

I believe that the key to my issue is in your #3 and #4 above.  In #3 you state that "Turbo Tax automatically added the amount of the 2022 excess to your Other Income". Looking at my 2022 Turbo Tax it is clearly not there and the 2022 Turbo Tax would have had no way to recognize that there had been excess income.  I had not contributed more than I was allowed to contribute, so the numbers would have looked ok to Turbo Tax that year.  It was only "excess" because I started Medicare in November, retroactive to September of 2022, so in 2023 they refunded all of my contributions, I had made through my employer from March 2022 through Sept 2022.  

Looking at my 2022 Turbo Tax return, the excess returned in 2023 is clearly not there in Other Income or in any other income category.  Since it was within the amount I was allowed to contribute, had I not started Medicare, it would have not been excess.  I am also still employed, so Medicare is secondary to my employer supplied HDHP health plan. So I had HDHP coverage all of 2022 (and 2023).  So 2022 Turbo Tax did not have any reason to have me pay tax on my payments which would be returned to me the following year, in 2023.

And looking at my 2022 Turbo Tax and my 2023 Turbo Tax, which I have not turned in ( I did apply for an extension), I am quite certain that the "excess" does not appear as taxable in either the 2022 or 2023 Turbo Tax.  Unless you have a suggestion on how to make Turbo Tax tax this fairly sizable returned amount, it appears I will have to go outside of Turbo Tax for my return this year.  Fidelity had told me it would be taxed in the 2023 tax year, which Turbo Tax does not appear to allow.

Thank you again.

James Bender

[BillM223]

Clarification: "but TurboTax automatically added the amount of 2022 excess to your Other Income." - This is true only if the excess contributions came through your employer (code W in box 12 on your W-2).

If the excess contributions were your "personal" (direct) contributions, then the excess are NOT added back to income; instead, the deduction on line 13 on Schedule 1 (1040) is reduced by the excess amount.

My bad, since so many people do contributions through the employer, we tend to forget to list all the possibilities.

"I had made through my employer from March 2022 through Sept 2022.  " - OK, did you employer give you a corrected W-2, so that the code W amount was reduced to be less than the annual HSA contribution limit? That would be OK.

"So I had HDHP coverage all of 2022 (and 2023). " - Sadly, in the eyes of the IRS, you did not have HDHP coverage. To have HDHP coverage, you not only need the HDHP coverage, but you can't have any confliction coverage, like Medicare, or normal employee insurance or an FSA or a variety of things.

So the month that you started on Medicare, it was as if your HDHP coverage ceased.

So, did your employer "correct" your W-2 for 2023? Is the code W amount in box 12 adjusted down to account for the time you were under Medicare?

It's possible that depending on what your employer did that there would not appear to be an excess in 2023. Please let me know what your code W amount was for 2023 (if zero, OK).

[Jc1bender]

Once again, thank you for your time.  I believe that I still have a problem with Turbo Tax.

My contributions were made through my employer (Raytheon), but they had nothing to do with the return of the excess.  You will recall that the funds returned were excess not because I had contributed what would normally be excess, but rather because in November, 2022, when I started social security payments, I was put on medicare part A as my secondary insurance and I had to have all of my contributions since March returned.  When I contacted my employer in late 2022, I told them I now had some social security coverage and to discontinue their contributions to my HSA.  I also asked about how to get my contributions made after March of 2022 returned to me in a form that I would be taxed on.  They told me that they had nothing to do with that but rather that I needed to contact the HSA company, Fidelity, and deal with them. So my employer had nothing to do with the "excess" returned.

When I spoke with a Fidelity agent I was told that the returned excess would come directly from them and the my employer would have nothing to do with it.  Since the funds would be returned to me in 2023, it would be listed on the 2023, 1099-SA they would send me and that would go into my 2023 tax return as income (since 2023 would be the year I received it), and I would pay tax on it in 2023.

The 2022 W2 from my employer, in box 12 code W shows the full amount they contributed and the full amount I contributed, as Fidelity had explained would happen, with nothing to indicate that most of it would be returned the next year as excess.  There was no corrected 2022 W2 from my employer.  

When I received the 2023 W2 from my employer there is no box 12 W entry as neither I nor my employer contributed in 2023.  So this all went as both my employer and Fidelity had explained it to me.  The excess returned never appeared on a W2 in any way to indicate it had been returned, but rather I am supposed to pay tax  on the excess that was returned to me in 2023.  Turbo Tax has had no way to add this returned excess in 2022 or 2023 and going through my 2022 Turbo Tax and my 2023 Turbo Tax, I am quiet certain that these returned funds have never been taxed.  I have generated a crude manual 2022 and 2023 tax return and the numbers come out very close to the Turbo tax numbers if I omit the returned excess.

If I was doing my taxes manually I could simply check the correct box in the form 8889 line 14b and these funds would be taxed, but you indicated that as soon as Turbo Tax sees the 1099-SA distribution code of 2 it concludes the returned excess is not taxable, which might be true in most cases but not in my case and looking through various IRS documents, a distribution code of 2 does not indicate if the returned excess should or should not be considered as taxable income.

I have a tax extension, and I am now pretty certain that I was not taxed on the returned excess in 2022 and clearly Turbo Tax is not taxing me on it this year.  If I omit the 1099-SA from this years Turbo Tax it show I owe exactly the same amount of tax.

I just have to believe that this is a bug in Turbo Tax, and I can't use it for this year's return.  Shortly I will look into having a professional do this year's taxes.

Again, thank you for all of your time and I wish you could point out an error in my thinking and analysis, but it has become pretty clear to me that in it's current form, Turbo Tax can't handle my case.

Thanks  James Bender