Dependent child with hdhp

[74tommyboy]

Hi,

 My daughter moved away to a different state in July of 2024. As a result of this, for the 2024 filing year, she is listed as my dependent. She took a new job that has an HDHP with an HSA account.  I just learned that any contributions she or her company made to the HSA must be withdrawn before 4/15 in order to avoid a penalty.

The issue I am experiencing is when we attempt to submit her tax return. It gives an error stating that form 8889, part 1, question 1 is missing a value for 'self' or 'family'.

However, when either of those fields are populated, it then gives an error that they should not be populated, based on her being a dependent. Because of this, I am in an endless error loop and unable to submit the return. Please advise.

[KrisD15]

Are you sure she is your dependent for 2024? Did you supply more than half her support for 2024? If she lived and worked in a different state, did you pay more than half her rent? Do you have her covered under your insurance policy? 

[74tommyboy]

Thanks for the quick response.  Yes, she was attending college with us from Jan until the end of June. She then took a new job and moved on July 7th.  It is my understanding that if I paid for her expenses for six months, then I should be claiming her as a dependent for 2024. Also, yes, she is currently covered under my HDHP plan.

[BillM223]

You have two issues:

1. Is your daughter a dependent and

2. If she is a dependent, what do you do about that "endless loop".

I will address the second issue first.

On her tax return, you will go through the HSA interview. You will answer that she did not have HDHP coverage (whether she did or not doesn't matter). You will also indicate that she will withdraw the entire excess when TurboTax states that she has excess contributions and asks what you want to do about it.

If she is able to withdraw the entire excess, there will be no penalty, although she will pay income tax on the excess if the excess was part of the code W amount in box 12 on the W-2. This is OK, because when she notifies the HSA custodian for a "withdrawal of excess contributions", the HSA custodian will likely send her a check for that amount (unless her employer grabbed it first - come back and tell us if that happens).

NOTE, she MUST notify the HSA custodian about this withdrawal BEFORE April 15th, preferably several days before).

By going through the HSA interview, this will make the numbers on the form 8889 correct.

Now, let's talk about the Review. In the Review, TurboTax is puzzled why you have an 8889 when you don't show any HDHP coverage, so it asks you to enter Self or Family on line 1 of the 8889. 

You can enter either one, I usually say "Self". It won't matter because when you said that you did not have HDHP coverage, the numbers on the 8889 were made correct.

As for your other issue (about being a dependent), please see this IRS page "Dependents". Note especially the "Answer questions to see if you can claim someone as a dependent on your tax return". This takes you to an IRS Interactive Assistant, which will help you make that determination.

Whatever you do, document it, because if you all are ever audited, you will need to show why you considered your daughter a dependent. As you can see, there are many variables relating to this - it is not cut-and-dried. So document for yourself what you decided and why, in case anyone ever asks.

[74tommyboy]

Thanks for the update.  I have made the updates you recommended. However, the final check still shows 8889. I think it may be showing because her employer also contributed to the HSA and it shows up on the W2. As you suggested, the plan is to reach out to the HSA administrator and withdraw both her contributions as well as the employer contributions.

How now?

[BillM223]

Yes, there will be a form 8889 on her return, because of the code W in box 12 of the W-2. NOTE: the code W amount is the sum of what her employer contributed plus any amount she contributed by means of payroll deduction.

Yes, this is called the "employer contribution", but that is a reference to how the contributions are handled, not to whom made the contributions.

Since the 8889 will be added to her return, in her Review, there will be the Self/Family question. As I said, just choose Self as a workaround for this question in the Review.

When she contacts the HSA custodian, be sure that she asks for "withdrawal of excess contributions" so that the custodian's paperwork will be correct.

NOTE: there may be a form on the custodian's website for this.

[74tommyboy]

Bill,

 Thank you, I went back through the questionnaire as you suggested and selected no HSA as well as 'self' on the question on from 8889.  After TT goes through its validations, it still gives the following error message:

'Form 8889-T: Line 3A12, Self should not be checked. You indicated on the Federal Information Wks that taxpayer could be claimed as a dependent of another, which makes taxpayer ineligible.'

To me, this is starting to feel like a bug in the software as no option, is the right option. Please advise.

Tom

[BillM223]

I do not know exactly what you are seeing (but I believe you because I've seen it before), but if you have the chance, on line 3, check NONE on 3A12 and any other lines (i.e., line 3A1, 3A2, etc.) you are confronted with.

While the numbers on the 8889 are correct, the review could be done better.

[Opus 17]

It's unclear what the best way to to handle this from the beginning would have been.  I suspect you could either clear her entire return and start over, or delete the W-2 and then delete form 8889, and go back to the W-2 first.  When you run the interview, if you said she had NO HDHP coverage, that shouldn't trigger the dependent error.

Because this is managed on several internal program worksheets, I think what is happening is you are correcting one error and then another error comes up because it is in a different location.

Also, note that the HSA bank must return any earnings attributed to the contributions (like interest).  This is taxable income on her 2024 return because it was from 2024 contributions, even though the interest is not actually paid until 2025.  She can report it as bank interest and check the box for "I did not get a 1099-INT for this interest."

[74tommyboy]

Thank you for your suggestions.  Here is what I ended up doing that resolved the issues.

I went into the forms and deleted any 8889 forms on her return.  Once that was done, I closed out forms and went back to the questionnaire.  I this point it once again asked none/self/family for hdhp coverage.  I first selected, self, but then the app expected the December line item to have a value.  I changed everything to 'None', this cleared the error and let me continue to submit her return.

Thanks everyone for the assistance.