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01-06-2018 06:23 PM
Just found out that my wife is ineligible for the HSA she has had for the last three years. We file jointly. How do we correct our tax returns going back three years?
Solved! Go to Solution.
01-06-2018 06:38 PM
Welcome to the H&R Block community.
You'll need to file Form 1040X to amend your tax return. First make the changes to the original return and then fill out the 1040X.
Your contributions to the HSA must be reported as income for the year in which they were distributed back to you.
Also, if contributions for any year were left in the account after April 15th then you'll need to fill out Form 5329 to calculate the 6% tax penalty on excess contributions.
Mail only the 1040X and any forms that have been added to your tax return or changed in any way to the IRS. So you should mail the 1040X, Form 8889, and Form 5329 for each year that you correct or add them for.
Note that if your wife had a high deductible health plan for these years and if she was not eligible for another type of health insurance then she qualifies to contribute to an HSA. You can have an HSA account after you are no longer qualified to make contributions, and you can still use the funds that were already in the account at the time you became ineligible tax-free, you just can't contribute to any further funds to the account.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)
01-06-2018 07:09 PM
Excellent. I appreciate both the quick reply and the clear instructions. Thank you!
My understanding is that:
In year-1 (2015), I should recompute my 2015 taxes with the total HSA contributions added to income and pay the tax on that plus a 6% penalty on the contributions.
In year-2 (2016), I would do the same, but also pay an additional penalty on any HSA funds carried over from year-1 (in other words, 6% of the difference between year-1 contributions and amount withdrawn for medical expenses in year-1).
Similarly, in year-3 (2017), I should move all 2017 contributions to income, pay that tax, and pay the penalty on anything carried over from 2016?
01-07-2018 10:06 AM
For 2015 you'll calculate the 6% penalty on anything that was not withdrawn by April 15th, 2016. Add into taxable income (report as a taxable distribution on Form 8889) all amounts that were actually distributed by April 18th, 2016. All amounts withdrawn, whether for medical expenses or not, are taxable income because you were not eligible to contribute.
For 2016 the 6% penalty should be calculated on everything remaining in the account after April 18th, 2017 (the remaining amount from the first year and contributions from the second year). All amounts that were distributed before that date for any reason are taxed as ordinary income (report as a taxable distribution on Form 8889).
For 2017, get everything out of the account by April 17th, 2018 so that you do not have to worry about then penalty again. The distribution will be taxable for the federal income tax. You won't have to pay the penalty on anything for your upcoming 2017 tax return if you get it all withdrawn.
Taxable distributions from Form 8889 are carried to Line 21 of Form 1040.