Use of Form 8889 for prior tax year

[Rbrtt]

I am using turbo tax to complete my 2024 tax return. I received a question regarding my 2023 HSA contributions. On December 1, 2023 I was eligible to contribute to my HSA as I had a HDHP but mid December 2023 I changed jobs and got a LDHP and no longer made HSA contributions. Turbo tax is giving me credit for my 2023 HSA contributions but also saying I will need to fill out a form 5329 for some reason. I consulted a tax pro at some company and they told me that I should not be receiving credit for my HSA contributions in 2023 on my 2024 tax returns. I cannot remove the HSA stuff from my tax. What should I do? 

[BillM223]

First, the only thing that matters is the coverage you had on the first day of the month, no matter what you did later in the month.

So, when you made contributions to your HSA in 2023, you were entitled to use the full annual HSA contribution limit, even if a few days later, you changed coverage.

Since I don't know how much you contributed in 2023 nor what your HDHP coverage was in 2023, I can't tell you why you have a 5329. The 5329 reports penalties on a variety of things, not just on HSAs.

You used the "last-month" rule in 2023. This rules stipulates that whatever coverage you have on December 1, 202x, if the coverage for the whole year, without regard to how many months you actually had coverage.

If you don't recall choosing to use the "last-month" rule, it's because TurboTax does it for everyone automatically. The catch is that when you use the "last-month" rule, you have to maintain HDHP coverage for the next year. You obviously did not.

So TurboTax is going to ask a series of questions that most taxpayers never see, because it needs to calculate what your allowed contribution limit would have been if you had not used the "last-month" rule. For many taxpayers (and I suspect for you), the result will be no extra tax.

It is true that you should not be receiving credit for the contributions in 2024, but I don't know enough about your situation to know why you think you are getting credit in 2024.

To know better, tell me:

1. How much did you contribute (you and your employer anyone else) in 2024?

2. What type of HDHP coverage did you have on December 1, 2023?

3. Why do you think you are getting "credit" for your 2023 contributions in 2024?

4. Please do not remove any HSA stuff from your 2024 return until we understand your situation better.

[Rbrtt]

Hi @BillM223 thank you for your response. I have answered your questions below. Thank you again for your help 

To know better, tell me:

1. How much did you contribute (you and your employer anyone else) in 2024?
$0

2. What type of HDHP coverage did you have on December 1, 2023?

I had a HDHP through my employer December 1,2023 - December 31, 2023 but also a LDHP starting mid-December 2023

3. Why do you think you are getting "credit" for your 2023 contributions in 2024?

My turbo tax return states I am getting a credit for the amount that I contributed in 2023 of $2000

4. Please do not remove any HSA stuff from your 2024 return until we understand your situation better.

I will not remove it. 

[BillM223]

Since you had HDHP coverage on December 1st and no conflicting coverage on that date, you were considered covered by your HDHP policy, no matter what happened later in the month.

Was the $2,000 the amount of excess HSA contributions in 2023? If so, and if you did not withdraw it before April 15, 2024, then the excess was carried over to 2024, to be entered on line 2 on form 8889, where it will be applied to your 2024 contribution limit. Unfortunately since you no longer have HDHP coverage, it won't be used up in 2024, so it will keep carrying over and dinged a 6% penalty until you do one of two things:

• Get HDHP coverage with no conflicting coverage or
• Take a distribution for the $2,000 and tell TurboTax that it was not for qualified medical expenses.

Is this what you meant by "My turbo tax return states I am getting a credit for the amount that I contributed in 2023 of $2000"? If not, please tell me on what form and line this $2,000 appears.

I have done a lot of explaining based on what I am guessing happened, but I would really appreciate you coming back and confirming what I am guessing.

[Rbrtt]

I had no excess contribution, which is why I am confused. I only made a contribution of $2,000 all of 2023 and no contributions in 2024. My Form 8889 is completely blank on my HSA account. When I look at turbo tax it doesn’t tell me what form the $2,000 credit is on, it just tells me I am getting a $2,000 credit and reduced my taxable income by an additional $2,000. I think I wil go with the tax professional to complete my return. Not sure where turbo tax disconnected is here or what I entered wrong. 

[BillM223]

TurboTax handles HSAs well, it sounds like what the tax software is doing is not clear to you (which is a common enough issue, even for tax professionals).

A "credit" is a technical term in tax - a dollar for dollar reduction in your assessed tax. HSAs do not create any credit at all, so I am puzzled when you say that you are getting "credit" for your $2,000.

When I look at turbo tax it doesn’t tell me what form the $2,000 credit is on, it just tells me I am getting a $2,000 credit and reduced my taxable income by an additional $2,000. 

OK, but you still haven't told me where TurboTax said this. Can you give me a screen shot of this page in TurboTax, hiding any personally identifiable data? Or, at the least, quote me what TurboTax said? Was it in the Review? On a Summary page? In some page in the interview? I cannot think of any screen in the product that would make a statement connecting "credit" and HSA.