My tax due drops a lot after I select "I was covered by an HDHP"

[xnervwang]

After I selected "Yes, I was covered by an HDHP during at least one month ruing 2021", I see my tax due dropped a lot. I'm confused. Because I think the amount contributed to my HSA account by my employer and myself is already in W-2 12c-W, and W-2 had been input in TurboTax at very beginning. I thought TurboTax should already know I'm covered by HDHP since I contributed to HSA.

1. How can this option impact so much?

2. What does it mean if I select "No, I did not have coverage" while I contributed to HSA in W-2?

[AnnetteB6 · Accepted solution]

The Health Savings Account (HSA) contribution is initially included in your income because you have not yet indicated that you were eligible to make a contribution to the HSA.  If you were not eligible to make the contribution, then it will remain on your return as income and you will pay tax on the amount.

Entering information into your return regarding HSA contributions is a two-step process.  Each step is likely to cause the refund/balance due number to change because TurboTax constantly updates the calculations as you go through the return. 

The first step occurs when you enter your W-2 that includes contributions to the HSA.  After entering the information from your W-2, the amounts contributed to the HSA are included in your income (thus causing a higher balance due or lower refund). 

Then, the second step is to verify your eligibility to contribute to the HSA due to coverage under a High Deductible Health Plan.  This results in the HSA contribution being removed from income since you were eligible to make the contributions.  Therefore the balance due amount will drop or the refund amount will increase. 

If you indicate that you were not covered by a High Deductible Health Plan, then you would not be eligible to make the contribution to the HSA and any contribution you made is considered an excess contribution which will be taxed if it is not removed by the due date of your return.