Tax Implications of married couple using both an HSA and FSA in the same year (2023)

[RichRydell]

In 2023 only (not previous years), my wife took took out an FSA ($3000) at her new job while I started an HSA in 2023 with a value of $5000. All of the FSA and HSA funds were consumed within 2023. My understanding is that I'll have to pay a 6% excise tax on the total value of my HSA and, in addition, the $5000 associated with my HSA must be claimed as income. Is this correct? Note, all of funds were utilized for medical expenses. Also, I read similar posts on this subject which mentioned paying "excess" only?

In addition, how do I address this matter in turbo tax?

Thanks!

[Opus 17]

If either spouse has an FSA, then both spouses are disqualified from contributing to an HSA. The tax consequence is that the HSA contributions are added back to taxable income. (A deduction is not allowed.)  there is also a 6% penalty on the excess contributions, but the penalty is charged on the amount of excess contribution, or the year-end balance in the HSA, whichever is lower. So if you spent all the funds in the same year, you will not actually be assessed the 6% penalty, you will only be assessed income tax on the disallowed deduction. 

[RichRydell]

Thank you for the clarification. I actually have $5.77 left in my HSA so I'm assuming 6% excise tax on that amount plus $5000 in taxable income. 

[BillM223]

To answer your last question, in TurboTax, in the HSA interview (go to it manually if TurboTax doesn't take you there), you will start the HSA interview for yourself and when you are asked "Did [name] have covered by a High Deductible Health Plan in 2023?", answer "Yes, I was covered by an HDHP at least one month a year". 

An additional question will appear, "What type of HDHP covered did [name] have during 2023?" Click on "I had different plan types at different times of the year".

This will open a new screen, in which you can check "None" for HDHP coverage for each month of the year (remember that Opus pointed out that you cannot have HDHP coverage when covered by an FSA). Yes, you had HDHP coverage, but this is how you disqualify it in TurboTax.

Then click on Calculate Max Contribution limit at the bottom. The next screen - looking very similar - will appear, with "Your maximum contribution limit is $0".

Now continue with the interview. Any HSA contributions by you in 2023 will be declared to be "in excess", and you should agree. 

NOTE: if your HSA contributions were made through payroll deductions, then the excess will be added back to your income. However, if your excess contributions were made by direct contribution to your HSA (not through your employer), the excess amount will simply not be added to Schedule 1 (1040) so it's not deducted from your income.

TurboTax automatically handles this situation; please do NOT try to fix this yourself.