Dependent Child and HSA Contribution

[Robertsonland]

My 21 year old daughter graduated from college in August '24 and got a job mid November '24. We didn't understand about the dependent child and HSA disqualification so we had her sign up for her HDHP and contributed $450 of her money and the company contributed $450 of their money as a match for December. She didn't get the money until mid January because of a mix up but it was for '24 and was reported on her W-2.

I found this post (https://ttlc.intuit.com/community/taxes/discussion/recently-employed-dependent-child-and-hsa-contrib...) with pretty much the same scenario just different dollar amounts.

So as I understand it I have these options

1. Don't claim her as a dependent on my tax return for '24

2. She can contact her HSA custodian and ask for "a withdrawal of excess contributions" and pay income tax on the amount.

3. Somehow carry over from '24 to '25 and make $900 less in contributions for '25

4. Keep the money where it is and pay the 6% ($54) penalty on top of the income tax on the $900. 

My thoughts are Options 2 and 4

With Option 2 if she does the withdrawal that would mean she would get her $450 back and the company would take back their $450 and she would pay income on the $450 (with a corrected W2

With Option 4 she would keep the entire amount, pay the income tax on the $900 and the $54 penalty and she could contribute the entire amount for '25.  

Question about option 4. Would she be able to withdraw her $450, keep the employer $450 in the HSA and pay the income tax on the $900 but only pay a $27 penalty?

Mainly I see the penalty as worth it due to the amount that was provided by the employer and I'd rather she not lose that but if I can lessen the penalty and not have to worry about carryover and such it's worth it to eat some penalty. But I need to understand the best way to go about this and stay in the right.

[MaryK4]

The 6% penalty would apply to every year that the excess is left in the account, and would include any earnings attributed to the excess contributions- so you will have to report and calculate going forward until the excess is corrected.  This would be a nightmare to me and as I said, you would still have to make the excess correction at some point.

[Robertsonland]

Ahh ok I understand that now. So then the carryover option would be the best way to go and have her decrease 2025 by $900 and she would only have the penalty for 2024? 

Other options would be to have her withdraw her $450 and see if the company will withdraw their $450 and proceed from there. I'm not sure what the company's policy is on this. 

Removing her as a dependent in '24 would cost $500 so want to avoid that if we can. 

[MaryK4 · Accepted solution]

Yes, I would do the corrective for 2025- it is the easiest administratively since no forms have to be changed and she will not lose the employer match, so she gets to keep the extra money from the matching funds!  @Robertsonland 

[Robertsonland]

Thank you. I'll have her adjust her 2025 contributions and reduce by $900. When 2025 taxes are being done I assume we'll need to note this "carryover" in some way?

[MaryK4]

You will not have to report the carryover to the IRS, but you will need to keep record of them- next year, when you enter the HSA information, you will want to enter it as other Employer contributions (see below).  Do not indicate that you had excess contributions.  @Robertsonland 

[Robertsonland]

Thank you!

[Robertsonland]

I'm trying to see WHERE the penalty is on my daughters taxes. We are using TurboTax Online but I can't see how to get to forms. How do I know the 6% penalty is being taken out. I want to verify before we file so we don't have something off. 

[DawnC]

Go to the Print Center to print/preview your forms in TurboTax Online - it is under the Tools Center menu on the left side panel.   Look for Form 5329 - Part Vll.    The amount on Form 5329 goes to Schedule 2 line 8.    You can preview Form 1040 and Schedules 1-3 without going to the Print Center.   Preview Form 1040 in TurboTax Online.  

[Robertsonland]

I tried that but it keeps wanting me to file first.  I click on "Print Center" and it says "Print, save or preview this year's returns" I click on that and it asks for my daughters DL which is working through the filing process. 

EDIT: Though when I click on "File" it tells me we need to upgrade to TurboTax Deluxe because our taxes are not "simple" so that would mean it's probably on there then.

[KeshaH]

On the left panel, go to Tax Tools and then Tools. On the white box that pops up, click on View Tax Summary. When you see the summary, click on Preview my 1040 on the left panel. Scroll until you get to Schedule 2. If the penalty is there, it'll show on line 8.

This line does report other penalties as well, so to be completely sure you'd need to view the full return so you can look at Form 5329 to see what's flowing there. However, if nothing is there you know the penalty hasn't been added.

@Robertsonland 

[Moe32]

I have the same situation; this message thread has been very helpful.  I was able to flag the HSA amount as excess income, but now I am having trouble efiling.  The Form 8889-T want me to pick Self or Family, but it does not like either choice.  TurboTax will not let me efile.  How can I get around this so I can efile?s

[AmyC]

You do have to indicate if the coverage was self or family coverage as that has different limits and the program needs to know which way to go. You should be seeing a larger difference in the excess if you pick self. You need to pick the correct answer.

Once you select the correct answer, the program should let you know you have an excess and allow you to file.

If you are seeing a review error, it may be a comment that you can bypass and continue on to e-file. If it is preventing you from e-filing, what is the new error?

Outside of the program: You need to determine if you will make a correction by changing this year's contribution or how you want to handle the excess.

@Moe32 

[Moe32]

[Moe32]

There is no way for me to get past this error, if I select nothing TurboTax says I need to select something.  If I select either Self or Family TurboTax says I cannot do that because my daughter is a dependent.  This is my 22 daughters tax return (she is my dependent because she was a full-time student from Jan to May 2024)