BulldogTom Posted March 25, 2009 Report Share Posted March 25, 2009 Help Please. My client contributed to an HSA, but he was not eligible. His spouse has coverage for the entire family. So he took the money out of the account. There were no earnings in excess of his contribution. I have tried to put this all together in the software, and this is what I am coming up with. His contribution is not deductible. His withdrawal is taxable. Since he did not have eligible medical expenses, he has to pay a penalty for withdrawing the money. This seems like a totally unfair result, but tax law is not fair. I hope I am missing something. Since California does not comply with the Federal on HSA's, we don't see many of them. Any help is appreciated. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
RJM Posted March 25, 2009 Report Share Posted March 25, 2009 Hi Tom.. I will give this a shot. No HSA's permitted for WI also. First, for CA, since no earnings accrued in the ineligible account, there is nothing to do. There was no initial deduction, there is no tax on withdrawal. So make sure it does not appear in the CA return at all. Second, for Federal, if no 1099 or 5498 forms were issued by the HSA custodian, there is also nothing to do. If there would have been earnings, they would need to go on Sch B, but since you said there were none, nothing to do. If taxpayer DID get a 1099 and 5498 (which is not due til May I think), then I would need to research how to handle. Maybe I am missing something at this late hour, but I think it might be this simple. Anyone else gone through an ineligible HSA contribution with a 1099 issued by the custodian? Quote Link to comment Share on other sites More sharing options...
RJM Posted March 25, 2009 Report Share Posted March 25, 2009 Just looked at the form 8889 instrux, and it says on pg 5 under "Excess Contributions" that you can exclude any errant contributions if withdrawn by the due date of the return. Also exclude any distributions. So I would completely ignore the whole thing on the federal and CA returns, given that there is no income involved. No form 8889 needed. Quote Link to comment Share on other sites More sharing options...
Cathy Posted March 25, 2009 Report Share Posted March 25, 2009 Help Please. My client contributed to an HSA, but he was not eligible. His spouse has coverage for the entire family. So he took the money out of the account. There were no earnings in excess of his contribution. I have tried to put this all together in the software, and this is what I am coming up with. His contribution is not deductible. His withdrawal is taxable. Since he did not have eligible medical expenses, he has to pay a penalty for withdrawing the money. This seems like a totally unfair result, but tax law is not fair. I hope I am missing something. Since California does not comply with the Federal on HSA's, we don't see many of them. Any help is appreciated. Tom Lodi, CA Tom, First, open a 1099-SA and a Form 8889. On the 1099-SA enter the distribution on line 1 and use the distribution code of 2. Form 8889 will then show the HSA distribution on 14a and the "excess" contribution withdrawn on line 14b....which cancels out the taxation of the distribution. The distribution MUST be shown on the tax return.....if not, IRS will send a bill for the taxes due + the penalty. In your case, your client definitely doesn't owe any taxes UNLESS the contribution was deducted from income on a W-2. In that case, you would use line 21 of the 1040 to report the HSA distribution as "other income" with "HSA" as the explanation. For anyone else who has the situation whereas the taxpayer had earnings on the contribution, the earnings would also be reported on line 21 of the 1040. Cathy Quote Link to comment Share on other sites More sharing options...
Cathy Posted March 25, 2009 Report Share Posted March 25, 2009 Just looked at the form 8889 instrux, and it says on pg 5 under "Excess Contributions" that you can exclude any errant contributions if withdrawn by the due date of the return. Also exclude any distributions. So I would completely ignore the whole thing on the federal and CA returns, given that there is no income involved. No form 8889 needed. RJM, Never, never, never ever ignore a distribution from an HSA....it causes more headaches in the long run. I have a questionaire I use each year and one of my clients flat out told me NO, she didn't have a distribution....she didn't have a retirement distribution either for that year. 2 years later, IRS sent her the bill for both items...the HSA distribution and the 401K distribution. She slipped up and told me that she knew about both but needed her refund to be for as much as possible. Charged her big time for the amendment......her refund for 2008 was docked for the difference in the tax liability.......now she'll have to wait on the excess taxes she ended up paying for her HSA distribution that was all for qualifying medical expenses.....silently I hope that amendment takes forever to process....enough is enough! Cathy Quote Link to comment Share on other sites More sharing options...
RJM Posted March 25, 2009 Report Share Posted March 25, 2009 Thanks Cathy... appreciate your help ! -Bob Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted March 25, 2009 Author Report Share Posted March 25, 2009 My problem is my client got the 1099 SA and it is code is 1. I don't like changing the distribution codes on the forms, because of exactly the reason you stated Cathy - if the IRS looks at it, they are going to say no way and send the bill first and ask questions later. I was hoping for a way to explain it on the tax return. My eyes are getting tired, so I think I will sleep on this and see if I can get it to come out right tomorrow. Thanks for the responses. Keep them coming. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
Cathy Posted March 25, 2009 Report Share Posted March 25, 2009 My problem is my client got the 1099 SA and it is code is 1. I don't like changing the distribution codes on the forms, because of exactly the reason you stated Cathy - if the IRS looks at it, they are going to say no way and send the bill first and ask questions later. I was hoping for a way to explain it on the tax return. My eyes are getting tired, so I think I will sleep on this and see if I can get it to come out right tomorrow. Thanks for the responses. Keep them coming. Tom Lodi, CA Tom, You shouldn't have any problems with IRS. You can always attach a statement with the return if you so desire. In looking at excess contributions, IRS says in the instructions to first look at your distribution(s) for qualified medical expenses during the year of the excess contribution. You deduct those distributions first before you calculate your excess contribution for the year. Inasfar as changing the code on the 1099-SA, it equates to telling the software that a rollover is shown as taxable income on the 1099-R where in reality, that is not the case at all. Sweet dreams! Cathy Quote Link to comment Share on other sites More sharing options...
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