Need HSA deducted from State income - it is already deducted from Federal

[PA resident]

I already filed and think I need to amend. As I am assembling my tax file,  I can see for Federal, I inadvertently double deducted $1,292 for HSA contributions - it's removed from my Federal Income already, and it's on as a line item for 8889 - the questionnaire wasn't clear to omit if it had been withheld from my income, or at least it wasn't clear to me.  Regardless, if I delete form 8889 to amend, my taxable amount for PA, for which my W2 does not remove the HSA "cafeteria plan" contribution, goes up. Looking at my 2023 taxes also filed through TurboTax, my HSA is correctly not on form 8889. But I didn't get an HSA deduction for the state either. Do I need to ask my employer for revised W2s for the state as well as amend my 2024 Federal return? Thanks for any guidance!

[BillM223]

1. What was the interview question that wasn't clear?

2. How were the HSA contributions made? Through your employer (i.e. code W in box 12 on your W-2?

3. "Regardless, if I delete form 8889 to amend, my taxable amount for PA, for which my W2 does not remove the HSA "cafeteria plan" contribution, goes up." Are you saying that the box 16 amount on your W-2 does not match the box 1 amount?

4. How do you plan on removing the 8889 to amend? What are you planning on doing?

5. Was the HSA contribution part of the code W amount in box 12, and did you also say that you made a "personal" contribution of the same amount? Yes, this would need to be fixed, but on the federal level, not the state.

Please add some context here. What did you do and what are you trying to do, and what does PA have to do with HSAs (it's normally invisible to PA returns)?

[PA resident]

	6:51 PM (31 minutes ago)		Reply
to TurboTax

Hi Bill! That was fast!  Thank you! So let me take these in order.

1. Not positive but in 2023 I did NOT enter an amount on 8889. 

2. Yep, box 12A.

3. Correct. Boxes 1 and 16 on my W2 have been different for my whole time at my employer.

4. Amending and deleting form 8889 was my original thought...until I saw I owed PA money when I did that!

5. I did not realize HSA was deductible in PA until I tried to amend, remove form 8889, and saw my amount go from a refund of $27 to an amount due of $40. If that makes sense!

[BillM223]

OK, so the box 16 amount is different form box 1 on your W-2 by something like your 401(k) payroll deduction?

How were you deleting the 8889? By going into Forms mode (TurboTax CD/download)? I am sorry, but I don't understand why you wanted to do this.

"I inadvertently double deducted $1,292 for HSA contributions " - How did you "double deduct" it? What exactly did you do (or think you did)?

Whatever you do, don't make changes for your 1040X using Forms mode. Everything should be done in step-by-step.

[PA resident]

Thanks Bill - The reason I am trying to remove the 8889 is that I can see the difference between my Fed W2 income and my state income is $1292, the exact amount of my HSA contribution. So by filling out the 8889 which, after research, says, don't use this form if you have a cafeteria plan (didn't know that's what I had, but evidently that's what they call in when it is suppressed from your federal taxable wages), I inadvertently have then deducted the HSA contribution twice for the Feds: once pre-W2, then on 8889. I am using online version.  Seeing my state taxes go up when I omitted the 8889 is the first time I realized I should have been deducting HSA from my state taxes all along.

[BillM223]

I think that your issue isn't the 8889, but the number on line 13 of Schedule 1 (1040).

There are two types of HSA contributions (well, more than two, but for the vast majority of taxpayers, there are just two):

1. Contributions derived from payroll deductions, reported with a code W in box 12 on your W-2.

2. Contribution made directly to the HSA custodian, i.e., not through the employer.

Contribution #1 is removed from Wages in boxes 1, 3, and 5 on the W-2 when it is created. Thus, these contributions are never in your income, so cannot be a deduction (in tax terms, this might be called an exclusion). Contribution #2 is reported on line 13 of Schedule 1 (1040), and it is what you would call a deduction. It is very important not to confuse the two.

Pennsylvania does not tax either type of HSA contribution (page 20 of the PA instructions:( "Pennsylvania allows four deductions against income. Deductions are allowed for: ...Health Savings Account contributions...".

The first type flows to PA in the federal income on the PA-40, as modified by PA rules. The second type is reported on Schedule O. HOWEVER, since both types of contributions are clearly marked on the federal return, there is no need for the taxpayer to enter either one on the state return.

So, in amending your return, you must look to see if you have a code W entry in box 12 on your W-2 and if you have an entry on line 13 of Schedule 1 (1040). If you do, you have probably double-entered your contributions.

If the contributions were indeed on your W-2 with a code of W in box 12, then you probably also entered this amount as a "personal contribution" in the HSA interview. In this case, the thing to do is to remove the entry as a "personal contribution" in the HSA interview. This will remove the duplicate entry and the extraneous deduction on line 13 Schedule 1 (1040). It will NOT remove the 8889, but that form is not your problem - it is the entry on line 13, Schedule 1 (1040) that is your double deduction.

If I understand your situation correctly, please remove the duplicate entry as a "personal contribution" in the HSA interview, and don't do anything else. As I said, the 8889 is not your issue.

[PA resident]

Thanks Bill. You are correct there is a relationship.

On my original as filed, there is an entry for $1,292 in box 13 of schedule 1 and there is a form 8889 as well. On the Amended Federal version - I haven't pulled the trigger yet - when I remove form 8889, there is nothing in box 13 of schedule 1. So can I assume Schedule 1 box 13 generates Form 8889?

I haven't filed the amended version yet because if I use TurboTax, where it seems that Form 8889/Schedule 1 flow from Federal to State, then it looks like I owe the state money because the $1,292 is not deducted on my W2 State box.  Do I need to try to get a revised W2 with the state and federal income matching? Or is there a way to just file the TT Federal Amendment, which would then be right, and not have it amend my state, which would then be wrong? Or do I need to do it manually and bypass TT? 

[BillM223 · Accepted solution]

As I understand it (please correct me if I am wrong) you showed HSA contributions made by means of payroll deduction on your W-2 in box 12 with a code of W, AND you deducted the same amount as a "personal contribution" in the HSA interview.

If so, you duplicated the contributions. When you amend your 2024 return, remove the entry for the personal contribution in the HSA interview (since it was already excluded on your W-2).

This will remove the entry on line 13 on Schedule 1 (1040). If you had made this duplication on your original 2024 return, then this amendment will increase your federal tax, and by extension will increase your PA tax.

Please do not remove the 8889 just to reduce your PA taxes, since such a move would produce and inaccurate tax return.

The 8889 reports on a number of issue dealing with the HSA. You must file the 8889 if you made any contributions to and/or took distributions from your HSA. You made contributions to your HSA so the 8889 belongs on your return. If you correct the duplication of your HSA contributions, then the numbers on your 8889 will change, so the 8889 should be a part of your amended return as well.
 

If you made an HSA contribution directly to the HSA custodian, then TurboTax will automatically add this to Schedule O on your PA return, and so it will be deducted in PA. If you should not have made this personal contribution on the federal return, the correct thing to do is to fix the federal return by removing the personal contribution and let PA take care of itself.

Did I understand you to say that the State Wages reported in box 16 on your W-2 included your code W amount in box 12 of your W-2? If your employer did this, this was a mistake on their part. As I noted in a previous post, contributions to HSA reported by code W in box 12 on your W-2 are NOT taxable in Pennsylvania, and therefore should NOT have been added back to state wages in box 16 of your W-2.

Many employers get confused by "cafeteria plans" and HSA contributions, thinking that there are one and the same. They are not. These are required to be treated differently when the occasion calls for it, like here.

OK, if your employer did this (adding your code W amount to state wages), then you can fix this in TurboTax.

Go into your PA interview. As you go through the interview, you will come across a screen entitled "Compensation Summary". Click on Edit for the employer whose W-2 has the code W in box 12. On the next screen, click on "I need to make an adjustment to the taxable amount of this income", then click on Continue.

 On the next screen, if you are sure that you code W amount from your W-2 was added to state wages on your W-2, subtract it from the PA taxable amount here. E.g., If your Wages in box 1 on the W-2 is $40,000, the code W amount is $1,234, and the state wages in box 16 is $41,234, then enter $40,000 for your PA taxable income.

The success of this depends on you being sure of what your employer did. But if you duplicated your contributions on the original return, you will not end up with smaller federal and PA taxes, if you do all this correctly.

[PA resident]

Thank you Bill! I will give it a shot!

[PA resident]

You are the BOMB!! Thank you Bill!! ♥️