TurboTax follows the way that the IRS handles HSAs. Contributions are considered taxable by the IRS until you have completed the 8889 to show that you had sufficient HDHP coverage.
HOWEVER, you don't complete form 8889 yourself; TurboTax does that for you as you go through the HSA interview (Search for hsa (lower case) and jump to it). If you are doing the total step by step interview, TurboTax will bring you here (eventually). In any case, you will be unable to e-file the return without the 8889 because the return will fail in the federal review. There is no way for the taxpayer to file a return without the 8889, unless he/she ignores the error messages in the review.
Note that once you enter the HSA interview, you need to go all the way to the end, as there are questions all the way through the interview that affect your deduction.
TurboTax correctly handles contributions. Can you tell us exactly why you think that the contributions are being taxed? Are they appearing on line 21 of Sch 1 (Form 1040)?
Here ya go ... fresh return. Enter all w-2 info EXCEPT HSA contribution. we get a refund of 3,737. Then enter the HSA amount of 6,900 and our tax refund decreases to 1,667. That is NOT correct handling of HSA dollars.
I have read the response to a similar complaint. I note that the METHOD TT chooses to use is to tax/penalize HSA W-2 amounts until form 8889 is completed. BUT TT neglects to go one step further, in my opinion, by informing the filer that form 8889 is required to remove the tax effect and direct the filer directly to form 8889 after the W-2 is completed. The filer is left to find it on their own ...
Hi Billie, My only recommendation at this point would be to be proactive ... either tell the filer at the point that the HSA is penalized/taxed about the 8889 and not to worry that their tax refund went down or their taxes skyrocketed, or direct them to the 8889 right away. THis, to me, seems a far better solution than to have the filer wait until the review to let TT find their own error and treat it as if was a filer error. That is, the filer sees their incorrect refund/tax due all the way through the process UNTIL they FINALLY get to the form 8889 ... perhaps the BETTER way to handle these funds is to wait until the review, when TT is sure that the filer refused to fill out 8889, to tell the filer that if they do not fill out 8889 that they will be taxed /penalized. That makes way more sense to me than the way you are handling it. BTW, I see you are an enrolled agent. I am not, but have sat for the CPA exam but became an internal auditor instead. I have 20 years in IT. My coding/accounting background is more in meeting user needs by writing use-friendly code.
TurboTax follows the way that the IRS handles HSAs. Contributions are considered taxable by the IRS until you have completed the 8889 to show that you had sufficient HDHP coverage.
HOWEVER, you don't complete form 8889 yourself; TurboTax does that for you as you go through the HSA interview (Search for hsa (lower case) and jump to it). If you are doing the total step by step interview, TurboTax will bring you here (eventually). In any case, you will be unable to e-file the return without the 8889 because the return will fail in the federal review. There is no way for the taxpayer to file a return without the 8889, unless he/she ignores the error messages in the review.
Note that once you enter the HSA interview, you need to go all the way to the end, as there are questions all the way through the interview that affect your deduction.