2020 Excess HSA Withdrawn Timely in 2021 TT saying too late and treating as income

[ab39off]

I over-funded HSA in 2020 by about $7425.  I only had HDP for 1 month as spouse got a non-HPD that we jumped in.  Yes, I put put $8100 in through Employer deduction in January.  I took this out and earnings of about $4.5K before filing my 2020 tax return.   I entered my  $12K  Excess from 1099-SA with Code 2 on my 2021 TT return.  I did not have an HDP in 2021, so no to all months.   When I get to the quesitons it asks if I did or will remove excess before I file and I say yes, and TT says its too late.   It is dropping it in as income and 6% penalty.   I know I need to get the amount to show up on Line 14B so it doesn't recognize income or penalty, but I must be entering the wrong answers, even though I think I am answering the questions it asks correctly.  

Help!

[Mike9241]

just to clarify

Yes, I put $8100 in through Employer deduction in Jan 

January of what year and on what year's w-2 was the 8100 included

is there any amount coded W in box 12 of 2021 w-2?

[dmertz]

Since you corrected the 2020 excess, you should be telling 2021 TurboTax that you did not have an excess from prior years.

[ab39off]

Hmm, when I enter the 1099-SA for the excess distribution it takes me down the rabbit hole.  

[dmertz]

The only thing that entering the code-2 2021 Form 1099-SA does is add the taxable gains shown in box 2 to your 2021 income.

 When asked by 2021 TurboTax, "Did you overfund your HSA in 2020?," you must answer No because the overfunding was corrected by the return of excess contribution.

[ab39off]

Full amount contributed in Jan 2020.  Withdrew all excess and earnings on them in March 2021 and recognized the excess and earnings as misc income on 2020 tax return.   

Received  2021 1099-SA as noted above.  
I believe I need to indicate the excess was withdrawn before I filed my 2020 return.   So it backs out the withdrawal from income in 2021.  

I okayed around on the answers for 2021 and the best I got was to deduct the excess HSA contribution but it still recognizes the earnings as income and likely is taking the 6% penalty.  

I should probably do 2021 by hand.  Frustrated with TT so I bought HRB and it doesn’t handle it right either.  And I see a lot of questions on this and none of the recommended fixes have worked.  Hard to imagine both softwares have botched this up.   I’m obviously not the only one who overfunded and now having trouble not getting taxed again and penalized.  

[ab39off]

I didn’t have HSA for 2021 so no contributions.  

[dmertz]

The earnings are subject to ordinary income tax on your 2021 tax return, but not to any penalty.

[ab39off]

I recognized the excess plus earnings on my 2020 return as misc income.  

Which is what I had came up with when researching it last year.  

I don't think there is any way around this and might be stuck recognizing the earnings in 2021 and will need to file an amended return for 2020.   

Thanks

[dmertz · Accepted solution]

Only the excess was taxable on your 2020 tax return.  The earnings distributed in 2021 are taxable on your 2021 tax return.  You'll need to amend your 2020 tax return to remove the earnings that you erroneously reported on that tax return.