HSA form 8889 splitting the deduction between spouses

[jobie]

Hello,  my husband and I are both over 55 years old and my husband opened a family HSA account in November of 2020.  He contributed $887 in 2020 and I did not contribute anything. Our 2021 Turbo Tax is stating that the $887 which my husband contributed in 2020 is now taxable "Additional Income" for 2021 because of the "last month rule". He turned 65 and went on Medicare in August of 2021 and was no longer eligible. I understand that because of the "last month rule" he would have had to maintain eligibility to his family HSA account for all of 2021 in order to be eligible to contribute the maximum amount in 2020. However, he only contributed $887. 

To find out why he was being taxed on the $887, I opened up our 2021 and 2020  8889 forms with the worksheets. I saw on our 2020 forms that Turbo Tax had automatically allocated all $7100 of our maximum joint contribution amount to my name, leaving only the $1000 catch-up amount in my husband's name. And, Turbo Tax had carried this information forward into our 2021 8889 worksheet. This should not have been an issue because $887 is still within the $1000 catch-up amount provided for my husband.   However, to test out how this $7100 allocation to me affects our taxes this year, I opened our 2021 8889 forms. Under the category of my husband's contribution amount it asks how much was allocated to his spouse in 2020. When I changed the amount from $7100 to $450, Turbo Tax decreased the amount of federal tax due (for 2021) by $335.  I cannot figure why this is happening, but if the IRS allows us to allocate contributions between spouses (in a family HSA account) any way we wish, why can't I amend our 2020 8889 forms to show that only $450 in contributions was allocated to me? I tried to amend the actual 2020 8889 forms on Turbo Tax and every change I make turns red and indicates an "error". 

[BillM223]

"I opened our 2021 8889 forms. Under the category of my husband's contribution amount it asks how much was allocated to his spouse in 2020." Are you saying that on the 2021 8889, there is a line referring to your spouse's 2020 8889? What line are you referring to?

"This should not have been an issue because $887 is still within the $1000 catch-up amount provided for my husband. "

The $1,000 "bonus" gets prorated just like the annual HSA contribution limit, if that is applicable.

So, on what day did you two get HDHP coverage in 2020? The day is important because the insurance you had on the first day of the month determines your coverage for the month.

How much did you contribute in 2021? (I see that it was zero in 2020).

I feel like something is missing here...

[jobie]

"Are you saying that on the 2021 8889 there is a line referring to your spouse's 2020 8889? What line are you referring to?"  Yes, It is actually item "C" on the Line 6 Smart Worksheet for both the 2020 and 2021 Forms 8889. It states "Portion of Line B amount to be carried to Line 6 of spouse's form." On my 2020 return, Turbo Tax allocated $7100 to me. As a result, when I am filling out the Step by Step on 2021 Turbo Tax it asked me questions about how much my husband contributed in 2020 and below that it showed that the "Deduction allowed to spouse" (me) in 2020 was $7100.

"The $1000 "bonus" gets prorated just like the annual HSA contribution limit, if that is applicable."  Yes, of course, you are right. He only had his HSA account for Nov and Dec. of 2020 so I believe that means he could contribute only $167 for the year ($1000 x 2 months and divided by 12). Yet Turbo Tax is saying the entire $887 must be counted as income in 2021 and we are getting charged a 10% fine on top of that. Why is he being penalized for the full $887?

Also, the bigger question is why can't I amend our 2020 return to show that less funds were allocated to me in 2020 since I didn't make any contributions that year anyway?

"So on what day did you two get HDHP coverage in 2020? The day is important because the insurance you had on the first day of the month determines your coverage for the month.)  We both got HDHP coverage on October 1, 2020.

"How much did you contribute in 2021?  (I see that it was zero in 2020.)" In 2021 I contributed  zero to my husband's family account. His family account is still open but he stopped contributing to it after July 2021 because he turned 65 in Aug. 2021. His last contribution was in July 2021. However, I remained on an HDHP plan and I opened my own family HSA account in September of 2021. I contributed $8200 to my family account in 2021. Turbo Tax 2021 notified me that I had over-contributed by $1192 for 2021 so I requested $1192 back from my HSA before 4/18/22.

Thank you for your help!

[jobie]

Also, my husband contributed $2070.81 to his family HSA in 2021.

[BillM223]

"It states "Portion of Line B amount to be carried to Line 6 of spouse's form."" - You confused me. I thought you had said that on the 2021 8889 there was a reference to the 2020 8889, but there's not.

"As a result, when I am filling out the Step by Step on 2021 Turbo Tax it asked me questions about how much my husband contributed in 2020 and below that it showed that the "Deduction allowed to spouse" (me) in 2020 was $7100." - OK, Now I know what you are talking about. Because your husband did not show HDHP coverage for all of 2021, he saw the question, "What type of High Deductible Health Plan did [name] have on December 1, 2020?" You answered "Family", and then you were asked about the "Deduction allocated to spouse". Sorry, I had not realized that you had wandered into that part of the interview. You confused me when I understood you to say that this was on the 8889 but it's not - it's in a part of the interview that most taxpayers don't get into.

OK. I am going to tell you what happened but first I need to point out that there is no such thing as a "Family HSA". Family and Self-only refer to the type of HDHP coverage that you had in any given month. An HSA belongs to the person who opened it (generally, who funded it). 

So in 2020, your husband got HDHP Family coverage and opened his own HSA. He was given the benefit of the last-month rule because he had Family HDHP coverage on December 1, 2020, so his annual HSA contribution limit was $7,100. This was conditioned on him staying under only HDHP coverage through December 2, 2021. He contributed $887.

Since neither the HSA nor the insurance were yours at this point, you were not a factor.

Then in September or so of 2021 your husband went on Medicare (I assume his birthday was after August 1). You remained on the Family HDHP policy, and opened your own HSA (remember, no such thing as a "family HSA"). You contributed $8,200 to your HSA in 2021. I do not know how much your husband contributed to his HSA before he went on Medicare - was it perhaps about $2,000?

Please understand that the HSA contribution limits are per HSA and not per person. So your husband's HSA in 2020 had the limit inflated to $7,100 by the last-month rule, and then had it reduced by his "failure to maintain HDHP coverage". Then, in accordance with the instructions laid out for form 8889 , your husband's contribution was re-evaluated for 2020 as if he had not had the benefit of the last-month rule. See the 4 steps under Line 6 on page 5.

I am puzzled as to why you were allocated a share of the Family HDHP limit when your husband could have used it.

Who is the primary taxpayer on your tax return? You or your husband? That is, to whom does the 8889-T belong to, you or your husband?

So, let's do this: on your husband's 2020 8889 (-T? -S?), please tell me the numbers on lines 2-13, and be sure to tell me which 8889 this is.

Sorry, but I still think that there is something I don't know yet about your return.

[jobie]

My husband's 8889 is the 8889-T. On the 2020 8889-T, line 2 is $0.00 and line $13 is $0.00.

Yes, my husband contributed $2070.81 in 2021. 

In regard to me being allocated a share of the Family HDHP limit, it was my understanding that by being covered by an HDHP plan, I could have opened my own HSA account and we could have shared the Family limit.  Turbo Tax did not "know" that I didn't have my own HSA account under my HDHP coverage. What puzzles me is that the Step by Step process never asks the user for input as to how much of the limit to allocate to one spouse or the other. For whatever reason, on the 2020 Turbo Tax program it chose to allocate $7100 to me. I just want to know if I can change that to prevent us from being charged this extra $335.

It was my understanding that when you open an HSA account you can turn it into a family plan by listing beneficiaries. Funds from the account can be used to pay medical expenses for those beneficiaries as well as the account holder.  That is a bit different from what you are saying, that there is no such thing as a Family HSA account.

I appreciate your effort to get to the bottom of this question and since you are thinking there has to be another piece to the puzzle, I will explain some additional details. Whether they are relevant or not, I don't know. When my husband and I went onto an HDHP plan in October of 2020,  he was the primary account holder and I was listed as a beneficiary on the account. And, as had always been the case when I had medical coverage under his plan, my medical card had his name on it, not mine. When my husband opened his HSA account in Oct 2021 ( I actually opened it for him) I was listed as a beneficiary and I was sent my own HSA debit card that was linked to his account. He retired in July of 2021 and he turned 65 in August of 2021. As of August 1, 2021 he went onto Medicare and of course was no longer eligible to contribute to an HSA account. He switched to a Medicare Advantage plan for retirees which is offered by his former employer. As his spouse, because I am not yet 65 I was eligible to remain on the same HDHP plan through his former employer. But unlike before, I was sent a medical insurance card with my name on it.  In order for at least one of us to continue making HSA contributions, I opened my own HSA account and listed my husband as a beneficiary. I understood this, too to be a Family account. It was under this account that I contributed $8200 last year.

I hope that helps.

Thanks!!

[BillM223]

"please tell me the numbers on lines 2-13,"

Sorry, I meant lines 2 through 13, not 2 and 13 - the curse of English.

"In regard to me being allocated a share of the Family HDHP limit, it was my understanding that by being covered by an HDHP plan, I could have opened my own HSA account and we could have shared the Family limit. "

Absolutely true.

"That is a bit different from what you are saying, that there is no such thing as a Family HSA account."

No, what I am saying is not at all different. Yes, the owner of the HSA can spend money for medical expenses for his/her spouse, any dependents, and even some people who are not dependents on the return but who would have been except for various reasons. This is why taxpayers often think of an HSA as a "joint HSA" because the couple can both contribute and be the recipient of HSA dollars.

But when the IRS says "Family", they are referring to the type of HDHP plan you have, because this determines your annual HSA contribution limit. That is, the concept of the higher contribution limit does not depend on the type of HSA (there is only one type), but on the type of HDHP coverage that you have at any given time. This means that the same HSA's limit may vary over time, as the HDHP coverage changes over time.

Your history makes perfect sense. The only thing you could have done differently (and most taxpayers don't realize this), is that you could have opened your own HSA at any time. Why would that matter? Because if you, the owner of the HSA, are 55 or over, you can increase your annual HSA contribution limit by $1,000 - but only to your HSA. If you two have two HSAs, then each of you can contribute that extra $1,000 - but each to his/her own separate HSA.

This is why you might see people talk about the annual HSA contribution limit being (this year) $9,200 - $7,200 for the Family coverage shared between the two of you, and 2 times $1,000...but you must put the $1,000 into the two separate HSAs. So the limit is actually $1,000 to one HSA and $8,200 to the other HSA, or you can split that $7,200 anyway you like.

As for what you want to do (changing the allocation of the Family limit for the prior year), TurboTax is following the direction in the instructions for form 8889. The wording of the instructions assume that the allocation was fixed when you filed your 2020 return. As you recall, when TurboTax detects a failure to maintain HDHP coverage, it calculates the HSA limit that you would have had had it not been for the last-month rule. Look at the last page in the instructions, which refers to the Line 3 Limitation Chart and Worksheet. The language here just refers to line numbers and does not make allowance for changing the allocation on the fly. Indeed, I would not have though that this would make a difference. 

I will be honest that I had never thought about going back and amending the 2020 return to change the allocation to benefit the taxpayer who failed to maintain HDHP coverage. What I do know is that TurboTax does not allow this. You say that you have the desktop software and have tried to override the 8889 for both years, and TurboTax won't let you. In any case, to do it the right way, you would have to formally amend your 2020 return, then carry forward your 2020 data to your 2021 return (yes, that means start over on your 2021 return.). I am not sure that the reward is worth the hassle, but the choice is up to you. 

To amend your 2020 return, please read this TurboTax Help page. This result of this process would have to be mailed to the IRS.

Then you would have to delete your 2021 return and start your 2021 TurboTax software again and re-import 2020 data to it.

[jobie]

Hello Bill,

I don't know if you are able to provide any input to the software developers, but this is something they should take into account. The step-by-step should notify the user that HSA allocations are being made for each spouse, and give the user the option to alter them. 

Beyond that, it is not clear to me why I would need to re-do the entire 2021 tax return after amending my 2020 return. It seems to me, if the only thing I altered on the 2020 return was the HSA forms, then when the 2020 data is pulled over to 2021 the only thing that would change is the 2021 HSA forms.  Perhaps what you are saying is that the only way to get the 2021 program to go back to the 2020 tax file and gather updated information would be to delete the current 2021 return and start the process all over again once I have finished the 2020 amendment.  But how could that be true?  I expect it is not uncommon for people to have to amend returns a year or two after they first submit it. I know that not all amendments create alterations in later tax returns but clearly sometimes they do.

That being said, I tried starting the process of amending our 2020 return already and because the Step by Step does not give you the option to alter the allocation, my attempts to switch to the "form" format and alter the figures on the form only result in Turbo Tax alerting me that the form is in error.  I may be able to print out the altered form and send it to the IRS as a 2020 amendment but I suspect any attempt to get Turbo Tax to carry that data forward to a new 2021 return will not be successful.

Thank you,

Jeanette

[BillM223]

Jeanette, actually this situation is quite rare. It is the first time in 6 years of answering questions on HSAs that I have seen someone have (1) failure to maintain HDHP coverage AND (2) have Family coverage in the prior year AND (3) wish the Family allocation in the prior year had been done differently. 

In the current year, TurboTax does the allocation automatically, and I have never seen that to result in a problem for the taxpayer. This situation of wanting to reach back into the prior year and change the allocation is, in my experience of answering some 5,000+ HSA questions, unprecedented. 

Still, there is always a new way to interpret things, so I will add this to my personal wish-list of things to look at and maybe update in the product - if the accountants at TurboTax even think that the IRS would permit it.

[jobie]

I'm glad this does not appear to have tripped up a lot of people, though I wonder how many it may affected but they did not realize it. In regard to whether the IRS would allow it, note that on the form 8889 Instructions under line 6, it explains that spouses can choose how to split the allocation. For my two cents worth, that fact alone should indicate that Turbo Tax give the user the option to modify the allocations in the Step by Step format.

I do appreciate the time you have given to my question. Could you also respond to the second paragraph in my last message regarding when and how Turbo Tax updates it's data when an amendment is filed for a prior year?

Thank you

[BillM223]

"note that on the form 8889 Instructions under line 6, it explains that spouses can choose how to split the allocation." - please note that this instruction is for the current year. It is silent on changing the allocation in prior year returns, and as I pointed out, the instructions referring to how to calculate the failure to maintain HDHP coverage make no mention of changing the allocation but just refer to the line numbers on the prior year 8889, in which the amounts are "frozen". 

"then when the 2020 data is pulled over to 2021 the only thing that would change is the 2021 HSA forms.  " - this makes the assumption that no data not directly involved with the section change would not also change. Clearly, you can't safely make that assumption, so the only safe ting to do is to carry over everything all at once. And it would not pay for TurboTax to write a huge amount of code what-ifing for every single data item being carried across. Could I carry this across safely? How about that? What about this, this, and this? No, this doesn't make sense, not when there is a simple workaround - to just redo the entire import.

[jobie]

Bill,

Thank you for the explanation about trying to get Turbo Tax to update one thing and how that may affect another part of your tax return that you don't realize. That  makes sense. 

I'm not sure what you mean about the Form 8889 instructions being silent on changing the allocation in tax returns prior to 2021. I haven't looked at the instructions prior to 2020. But I am looking at the Line 6 Instructions for the 2020 Form 8889 right now. It states " If you are treated as having family coverage for each month, divide the amount on line 5 equally between you and your spouse, unless you both agree on a different allocation (such as allocating nothing to one spouse). " This same language is used in the 2021 Form 8889 Instructions. Please explain if there is something I am missing. In any case, this is as far as we can go with it. It was very helpful for me to have your daily response to my questions and comments, given the fact that the tax deadline was only a few days away. Anything you can do to point this matter out to the Turbo Tax accountants, I would appreciate.

Thank you.

[BillM223]

Yes, Jeannette, the instructions read just the way you quote. However, there are a number of areas in which a choice made in one year cannot be revoked in the next year. The instructions don't say anything about this either way. It's not that you can't do it, it's that TurboTax took the literal instructions in for the 8889 and Pub 969, which refer to forms and line numbers in the prior year return that you filed, and coded the software that way. 

There are always going to 1,00,001 things that fall between the cracks because the IRS has never gotten around to discussing one particular situation. But TurboTax is not in the business of guessing how the IRS would interpret this - it has to take the literal path that is easy to justify because it's in the instructions.

In this case, if you want to take this position that your action of amending the prior year return to reduce your tax on the premise that it's not forbidden, that is absolutely OK for you to do. But TurboTax has to code for what it knows is right, not what it infers might be right. Thus, there will always be some things that you might think that TurboTax should do, but TurboTax chooses not to. 

In many cases, TurboTax allows you to override its computations in the desktop product but it can't in every case. If nothing else, TurboTax must generate a tax return that is acceptable to the IRA when it parses the XML data file upon receiving the e-file, so it prevents certain overrides even when the taxpayer wants to do it.

And believe me, we discuss issues like this often.

[BillM223]

And thank you for your patience and understanding.

[jobie]

Thank you Bill. That's very interesting to learn about. Thank you for explaining.  I went ahead and filed our returns by the deadline. I may try and amend our 2021 and 2022 returns by hand, just to address this one matter. I realize that the amendments will not be incorporated into my Turbo Tax records, and therefore it will not be included with the 2021 data that gets pulled into  my 2022 return next year. Given that I will only be changing the 2020 allocation of HSA funds in 2021, and making the applicable changes to form 8889 for 2022, I cannot think of a way that it would impact future returns.