HSA Account Value Impacts Tax Liability

[eecai]

I am filing tax return for 2024 and when I entered my HSA account value by year-end, my tax liability increased a lot. I have normal distribution in 2024 due to medical expense but I did NOT contribute to the HSA account in 2024 at all (all values are from previous years that was contributed within the limit). I suspect turbotax considers this is overfunded. Anyone know how I should resolve it? Should I just put 0 as year-end account value?

[BillM223]

Did you get an explicit message from TurboTax in the HSA interview that you had excess contributions? It's hard to miss.

I can't be sure but are you saying that you did not carry over any excess contributions from a previous year, nor made any contributions in 2024? If so, what do you mean by "I suspect turbotax considers this is overfunded."?

OK, when did TurboTax ask you about the value of your HSA at the end of the year. One place is when you have excess HSA contributions and wants to assess a 6% penalty on the carryover (the penalty if 6% of the smaller of the carryover or the amount in the HSA at the end of the year). The other place might be if you were asked if the lapse in HDHP coverage was because of disability.

The first case is far more common, but I can't imagine why entering your HSA year-end account balance would increase your amount due. 

Let's work on your "overfunded", because I can't see how you could be overfunded if you didn't contribute anything.

Can you tell me more about your situation?

[eecai]

Thank you for helping me look into this.

I didn't get a message of excess contribution but couldn't consider other reasons. I didn't have HDHP coverage in the past so this should be the reason either. 

I did test adding 0 as a year-end value, which would change the total distribution value in the HSA summary page at the end of the interview and result in a lower tax liability. So somehow my year-end value was considered as a distribution (on top of my actual distribution) by turbotax. 

[BillM223]

"I did test adding 0 as a year-end value, which would change the total distribution value in the HSA summary page at the end of the interview and result in a lower tax liability. So somehow my year-end value was considered as a distribution (on top of my actual distribution) by turbotax. "

This does not make sense. I do not know how the ending HSA value could be considered an HSA distribution.

Upon rereading your initial post, I see that you did take distributions from your HSA in 2024, so you are required to add form 8889 to your return. You do that by going through the HSA interview.

OK, I think I see what happened. You had a carryover of excess HSA contributions from some prior year. Because you did not have HDHP coverage in 2024, this carryover - which is treated as a personal contribution (line 2, form 8889) - in the next year, caused an excess contribution in 2024 as well. 

Since you did not "cure" this carryover in 2024, it created another carryover of excess contributions to 2025. This new carryover is charged at 6% of the smaller of the carryover or the value of your HSA at year-end (hence the question about the value of the HSA).

So let me know if this matches your case.

[eecai]

Thank you. 

I am very positive I didn't overfund my HSA (I only had one-year contribution and it was below the federal limit). In the HSA interview, I selected "I did not overfund my HSA in 2023", but this doesn't help. Is account value a critical field? Or can I leave it blank? 

[BillM223]

"I only had one-year contribution and it was below the federal limit" - taxpayers often accidentally indicate to TurboTax that they made excess contributions, even when the taxpayer is sure that the amount contributed was below the limit.

But let's leave that aside, I want to understand why you are getting a request for the end-of-year HSA value. You should not willy-nilly enter zero just to reduce your tax due. 

Can you show me the screenshot (with any personally identifiable information redacted) where you are being asked this? I think you must be in a part of the HSA interview that you should not be in. Or, give me the heading on the screen?

[eecai]

I think I figured out the reason. When I was asked if I inherited HSA, I selected yes as I interpreted the instruction that "unless it's inherited from a spouse, select yes". After selecting No, there was no interview questions relating to the account value anymore.

Really appreciate your help in the case though!!!