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Valued Pioneer
Posts: 4
Registered: ‎02-06-2018
Accepted Solution

prior year excess HSA contribution, form 8889 error?

Hello,

 

I am using H&R Block 2017 Basic, purchased and downloaded a few days ago. I used this product last year as well, and the 2017 version has imported my 2016 return. It looks like something is not being calculated correctly on form 8889.

 

In 2016 I had excess contributions of $1500 to an HSA that was part of a family HDHP. This was reported in my 2016 return and the 2017 software recognizes it. I eventually spent all of the money in that HSA (around middle of 2017). I was only in that HDHP for January-June of 2016 since I changed jobs. The insurance with the job I had from July 2016-October 2017 was not a HDHP. I then changed jobs again in November 2017 and started a family HDHP with new HSA. I contributed $1120 to this HSA in 2017, and nothing I am contributing in 2018 is for 2017 expenses.

 

Everything that the software has filled out in form 8889 looks correct except for line 13. Line 2 is $0 (since all contributions were through my employer) but line 13 is $1500 (the full amount of my 2016 excess contribution). It seems like the software is trying to tell me that the excess on which I paid additional tax last year is now fully deductible. But the instruction for line 13 just says to enter the lesser of line 2 or line 12 so I think it should be $0.

 

Thanks for reading this! - Jason

Esteemed Neighbor
Posts: 193
Registered: ‎02-28-2016

Re: prior year excess HSA contribution, form 8889 error?

It appears that you never officially withdrew the excess $1500 for 2016. By that, I mean you did not contact the HSA bank and ask specifically for an excess contribution withdrawal before 4/17/17 (tax due day). In 2016, you paid tax on the $1500 and a penalty (Form 5329) for not withdrawing it. Simply spending the money did not eliminate the excess because you had opened aand contributed to another HSA in the same year. Had you not started a new HSA, the story would be different.

What I believe has happened this year is that the program is applying the $1500 as a 2017 deductible HSA contribution. It is doing this because having a family HDHP in December of 2017 allows you to make a full annual contribution of $6750. This is allowed because of the last month rule. Be aware however, that if your family HDHP should lapse anytime in 2018, your 2017 contributions that are in  excess of the amount allowed based on the actual months in the new HDHP will be disallowed resulting in tax and penalty.

Valued Pioneer
Posts: 4
Registered: ‎02-06-2018

Re: prior year excess HSA contribution, form 8889 error?

Thank you for the quick reply.

 

I think I understand your point about why the software might be doing this, but are you agreeing that it is incorrect?

 

I didn't contribute $1500 in 2017 and the amount I did contribute wouldn't be an additional deduction anyway since it was through my employer.

 

I am able to override the line 13 amount but it says I will not be able to e-file with this override.

 

Will this be fixed? I am not in a hurry to file so can wait for updates.

 

Thanks,

Jason

Esteemed Neighbor
Posts: 193
Registered: ‎02-28-2016

Re: prior year excess HSA contribution, form 8889 error?

Based on what you have stated, the software is correct; the $1500 excess remained in the account. You did not withdraw $1500 using an excess withdrawal request. Simply spending the money from the account did not properly address the excess. The software automatically applies any 2016 excess to 2017 as a contribution in addition to the $1120 (pretax) from employment. Your total 2017 contribution is $2620 (only the $1500 should appear as a Form 1040, line 25 deduction).

 

Do not override. There is no update required.

Valued Pioneer
Posts: 4
Registered: ‎02-06-2018

Re: prior year excess HSA contribution, form 8889 error?

I am going to accept your answer as the solution. I went ahead and emailed the IRS to verify this and will update the thread if I get new information. I still don't understand why MIN(0,5000) = 1500 but perhaps I am overlooking something.

 

Thanks again,

Jason

Esteemed Neighbor
Posts: 193
Registered: ‎02-28-2016

Re: prior year excess HSA contribution, form 8889 error?

I will refer you to IRS Publication 969,

 

"Deducting an excess contribution in a later year.

You may be able to deduct excess contributions for previous years that are still in your HSA. The excess contribution you can deduct for the current year is the lesser of the following two amounts. Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. The total excess contributions in your HSA at the beginning of the year. Amounts contributed for the year include contributions by you, your employer, and any other person. They also include any qualified HSA funding distribution made to your HSA."

 

https://www.irs.gov/pub/irs-pdf/p969.pdf

Valued Pioneer
Posts: 4
Registered: ‎02-06-2018

Re: prior year excess HSA contribution, form 8889 error?

A few more details...

 

In 2016 my return included form 5329. In this form, line 48 = $1500 (total excess contributions).

In the mini-worksheet for line 49:

 

  line a = $908 (value of HSA on last day of 2016)

  line b = $54 (6% of line a)

  line c = $90 (6% of line 48)

  line d = $54 (tax due, minimum of lines b and c)

 

So line 49 = $54.

 

Form 8889 shows the $1500 excess contribution and indicates that this was NOT included as income on my W2. It is therefore correctly added as income on 1040 line 21, so I did pay income tax on the excess in 2016.

 

I understand the Pub 969 comments to which you referred, but still have these questions:

 

[Q] The allowed deduction for prior year excess is the lesser of the 2017 limit or the total excess contributions in my HSA at the beginning of 2017. Per 2016 form 5329 (info shown above) this latter value is $908. Shouldn't the software deduct $908 instead of $1500?

 

[Q] On what form is this deduction really supposed to be applied? Form 8889 seems to the appropriate place, but it never refers to prior year excess contributions and putting a number greater than 0 on line 13 clearly violates the instructions. Perhaps the IRS is going to update the form and the software (knowing this) is overriding the instructions to insert the correct number?

 

 

Highlighted
Esteemed Neighbor
Posts: 193
Registered: ‎02-28-2016

Re: prior year excess HSA contribution, form 8889 error?

[Q] The allowed deduction for prior year excess is the lesser of the 2017 limit or the total excess contributions in my HSA at the beginning of 2017. Per 2016 form 5329 (info shown above) this latter value is $908. Shouldn't the software deduct $908 instead of $1500?

 

I see your point but disagree. The $908 was the basis for the penalty only. Look at it this way. You were required to pay tax on the full $1500. Therefore, the portion of the $1500 that you withdrew ($1500 - $908 = $592) was not tax free even though used for medical expenses. You need to correct that by getting the deduction for the full $1500 in 2017.

[Q] On what form is this deduction really supposed to be applied? Form 8889 seems to the appropriate place, but it never refers to prior year excess contributions and putting a number greater than 0 on line 13 clearly violates the instructions. Perhaps the IRS is going to update the form and the software (knowing this) is overriding the instructions to insert the correct number?

 

This is one of the areas where the original form (8889) or the instruction booklet has never been revised to show explicitly how the excess carried over is to be handled. The instructions booklet is vague as well. The software handles it correctly.