Excess contribution to HSA withdrawal non medical expense

[turrbouser007]

Hi,

I forgot to remove the excess contribution to my HSA account for the tax year 2018. Therefore, for tax year 2019, I have to pay a 6% penalty fee on this excess contribution.

In order to remove this excess contribution for tax year 2020, the best solution is to remove the excess contribution as a non medical expense and pay a 20% penalty in addition to the accompanying income tax. For 2020, I am no longer working in the USA, so I want to remove the whole amount (not just the excess) of the HSA account (~$3000) since I do not use the HSA account anymore. My penalty for tax year 2020 would be as follows: 20% of $3000 = $600 and the income tax on the $3000 would be zero since I would not have income in the USA, is this correct? I will exclude the foreign earned income since I will make less than $105,900 overseas.

Thank you for the help.

[KarenJ2 · Accepted solution]

If you exclude your other income using the foreign earned income exclusion, then you should not have to pay income tax on your distribution of $3,000.  You are correct regarding the $600 penalty.  You will need to pay tax on the penalty.

[turrbouser007]

Hi @KarenJ2,

Thank you for your answer.

What do you mean by paying a tax on the penalty? Is there an additional tax on the $600 penalty?

Thank you.

[KarenJ2]

Thank you for asking.  I am sorry I was not clear.  I just meant that you will have to pay the penalty of $600 even if your taxable income is $0.