TurboTax putting a negative value on line 7 of Form 8606

[begr]

I made a one-time distribution of $5150 from my Traditional IRA to my HSA (and received a 1099-R for this distribution). I followed all of TurboTax's interview questions to properly characterize this distribution as a one-time distribution to fund an HSA. However, my e-file was rejected by the IRS due to a negative value of -5150 on line 7 of Form 8606. According to Form 8606 instructions, this line should NOT include a one-time distribution to fund an HSA. I cannot find where or why TurboTax is putting this negative value here. Please help!

[begr]

I also found that TurboTax is replicating the $5150 amount on lines 1a and 1f of the 1099-R Summary form. This is wrong; line 1a should be 0. If I override line 1a to 0, the -5150 value on line 7 of From 8606 goes away.

Why is TurboTax replicating this amount on the 1099-R Summary form?

Note my 1099-R form from Vanguard has $5150 in box 1, box 7 distribution code G, and IRA/SEP/SIMPLE checked. Again, this 1099-R form is for a one-time IRA to HSA funding distribution.

[BillM223]

Thank you for your detail. With it I was able to reproduce the 1099-R Summary issue. I am not sure about the interaction of the 8606 and this HFD. (HFD = HSA Funding Distribution, or an IRA amount transferred to an HSA).

I would guess that TurboTax is putting the negative number on your 8606 because of the duplication of your distribution on lines 1a and 1f on your 1099-R  Summary, which causes line 2 to be a negative number. The same number is subtracted twice. 

As you can see on line 7 of the 8606, the instructions are "Enter your distributions from traditional, traditional SEP, and traditional SIMPLE IRAs in 2024. Do not include rollovers (but do include certain 2024 retirement plan distribution repayments treated as rollovers (see instructions)). Also, do not include qualified charitable distributions; a one-time distribution to fund an HSA; conversions to a Roth, Roth SEP, or Roth SIMPLE IRA; certain returned contributions; or recharacterizations of traditional IRA contributions", so the HFD should not even appear on line 7 - well, the distributions shouldn't be a negative number either.

OK, what I don't know is the role that your 8606 plays in this. To save me a lot of time, could you do me a favor? 

Would you send us a "sanitized" version of your return. "Sanitized" means that all personably identifiable data is removed so that we have no idea who you are.

You do not have to sanitize the return, because the process of creating a token (an entry into our data base that points to your sanitized return) invokes a process which removes all personally identifiable data.

To give us a token, please do the following:

Online

• Log into your TurboTax Online tax return
• On the left, click on Tax Tools
• Under Tax Tools, click on Tools
• In Tools Center, click on Share my File with Agent
• TurboTax will give you a “token”, a 7-digit number or 25 digit number
• Post the token number in this thread
• Be sure to add to that post “@” “billm223” (without the space in between) so that I will be notified

Desktop (Windows)

• Open your return in the desktop product
• Look along the top and click on Online
• Click on Send Tax File to Agent
• TurboTax will give you a “token”, a 7-digit number or 25 digit number
• Post the token number in this thread
• Be sure to add to that post “@” “billm223” (without the space in between) so that I will be notified

Desktop (Mac)

• Open your return in the desktop product
• Look along the top and click on Help
• Click on Send Tax File to Agent
• TurboTax will give you a “token”, a 7-digit number or 25 digit number
• Post the token number in this thread
• Be sure to add to that post “@” “billm223” (without the space in between) so that I will be notified

This may save us a lot of time in recreating the issue, and it insures that we will be working on your issue.

[dmertz]

The result seems to be indicating that you reported the $5,150 both as transferred to an HSA and as rolled over.  An HFD is not a rollover.  When asked if you moved the money to another retirement account, you must indicate that you cashed out $5,150 and did not move that $5,150 to another retirement account.  I suggest deleting the Form 1099-R and reentering it.

[begr]

Thank you @BillM223 . Per your instructions, I've sent a sanitized version of my return with token 122603686-66800694.  I appreciate you taking a look into this to see if you can determine what's going on.

[BillM223]

Thank you, @dmertz, as always you hit the nail on the head. The problem is the distribution code of "G" on the 1099-R. If the OP answers the HSA questions honestly ("did you put the money into an HSA?"), then the $5,150 is duplicated on the 1099-R Summary and eventually blocks the e-file when the number somehow wanders over to the 8606. 

If I change the distribution code to 7 (normal distribution) however, the 1099-Summary is correct but the 8889 is not because TurboTax has no idea that there was a contribution to the HSA, and never checks the distribution for excess contributions.

So I am thinking of workarounds.

1. Ask the IRA administrator for a corrected 1099-R with the distribution code changed to 7. However, not only are such administrators loath to issue corrected forms, the administrator could point out that it WAS a trustee to trustee transfer, (right, begr?). dmertz, should the distribution code be 7 in this case, anyway?

2. If I leave the distribution code as G, begr could go through the HSA interview, and could do the following:

A.  In the 1099-R interview, do NOT tell TurboTax that the money is going into an HSA. Now the 1099-R Summary and hopefully the 8606 are OK.

B. In the HSA interview, list this as an employer contribution that was not listed on the W-2**. In this case, the 8889 will have the distribution as a contribution, and check it against the calculated annual HSA contribution limit (begr, this has to happen). If there is no excess, then the only funny thing is that the funding distribution appears on line 9 (employer contributions) of the 8889 as opposed to line 10 (qualified HSA funding distribution) on the 8889. But since both numbers are added into line 11, the effect is the same, I think.

** You do this by going into the HSA interview, and when you see the question, "Did [name] put money into the HSA", answer Yes. Then hit Continue on the next screen (Let's enter [name's] HSA contributions" (i.e., no entry on this screen). Then on the next screen where you see, "Did your employer tell you about any other contribution?", answer Yes. 

Three new lines will appear. Enter the amount sent to the HSA in the bottom line "Employer and payroll contributions not reported in box 12 of your W-2". Now this will appear on line 9 of the 8889, and almost everything will be perfect.

OK, dmertz, how does this workaround sound to you?

begr, what type of HDHP coverage did you have in 2024 and for how many months? Also, did you make any other contributions to your HSA in 2024?

begr, oh, and thank you for the token, but I was unable to use it. For whatever reason, TurboTax thinks the file is corrupt. I guess this is the best version of sanitizing...now nobody can read it 😉

[dmertz]

I didn't anticipate that the payer had prepared the Form 1099-R incorrectly by using code G.  This sounds like the sort of mistake a bank would make, reporting an HSA Funding distribution as if it was a direct rollover, which it is not.  It's because of things like this that I insist on not calling an HFD a rollover.  This sort of error usually results from a typically inadequately trained bank representative who marks the wrong box on the distribution form.

Ideally one would get the bank to correct the Form 1099-R to have code 1 or 7 depending on the age of the individual.  If the bank refuses to correct the form, I think it would be appropriate to submit a substitute Form 1099-R with code 1 or code 7 in place of the code G, but doing so will prevent e-filing.  With code 1 or code 7 and the IRA/SEP/SIMPLE box marked, TurboTax will ask if the distribution was transferred to an HSA and will prepare Form 8889 appropriately once the HSA section of TurboTax is visited to establish eligibility to have made the contribution.  No workaround needed.

(Many banks use distribution forms provided by Ascensus which have boxes to mark to indicate the type of distribution and by marking the wrong box the back office blindly prepares the Form 1099-R based on the box that was marked.  When dealing with banks there are occasions where I've had to refuse to sign a distribution form until the rep acquiesced to preparing the form correctly.)

[dmertz]

Actually, for someone over age 59½ where code 7 would be used on the Form 1099-R, it makes no sense to claim an HSA Funding distribution because the distribution is not subject to any early-distribution penalty.  Such a distribution should instead be reported as an ordinary distribution and an above-the-line deduction should be claimed for a personal HSA contribution.  Only an IRA distribution for someone under age 59½ reported with code 1 should be claimed as an HFD.

[begr]

BillM223, per your question, I had single HSA coverage for all 12 months of 2024 and did not make any other contributions to my HSA besides this one-time funding distribution.

The 1099-R form in question (with distribution code G) is from Vanguard and I doubt they will be willing to provide a corrected version.

Another workaround I found from an earlier post is to manually zero out the line 1a amount (Less: Amounts rolled over) in the 1099R Summary Form (but keep the line 1f amount (Less: HSA funding distributions)). This results in a correct Form 8086 (line 7 is 0). However, doing this prevents eFile, so I would have to mail in my return. 

@BillM223 and @dmertz , does this sound like a reasonable workaround?

[dmertz · Accepted solution]

I've seen more than a few posts on this forum that suggests that Vanguard reps aren't all trained as well as they should be.

I stand by my position that, because code G is only valid for the movement of funds to another retirement account and an HSA is not a retirement account, that Vanguard has the responsibility to correct the Form 1099-R.  It's their mistake, after all.  Absent that, I think it would be appropriate to submit a substitute Form 1099-R with code 1 or code 7 in place of the code G.

[begr]

Thanks @dmertz. I've sent a request to Vanguard for a revised 1099-R. I expect they will not agree to provide one. I will then take your suggestion and use a substitute Form 1099-R with code 1 or code 7 in place of the code G.