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Video instructions and help with filling out and completing form 8889 instructions

Instructions and Help about form 8889 instructions

Hey everybody today we're going to be talking about the HSA last month rule and testing period this video is brought to you by easy form eight eight eight nine calm it's an online simple tax preparation software for the HSA tax form eight eight eight nine and the time you spend viewing this video you could use it instead to have your completed form a to date nine for this tax year that's easy form eight eight eight nine calm alright so today we'll be talking about a number of things relating to the last month rule and testing period and we're going to do this in four sections the first section we'll use to define some definitions for what we're talking about the second section will talk about who the last month will applies to will then discuss penalties for failing the testing period and finally how to avoid these taxes and penalties and using the last month rule safely so to start off we know that HSAs have a yearly contribution limit which is a maximum amount that can be contributed to the HSA for a year so this is really a theoretical maximum or an actual maximum amount that can be applied or contributed regardless of what your situation is you can't contribute more than this so for 2016 these amounts should look pretty familiar and there's an over fifty-five catch-up contribution which is a thousand dollars on top of the cellphone lien family amount so there is a distinction here between the yearly contribution limit and your contribution limit your contribution limit is the maximum amount you can contribute to your HSA based on your coverage type your coverage duration and your age the key point here is that it's prorated the number of months that you have coverage affects the contribution that you can make to your HSA so for example if you had self only HSA coverage for January February and March those are the only months you have for 2016 the maximum contribution limit would be reduced by this ratio of three out of 12 months that would leave you with a contribution limit of eight hundred and thirty seven dollars and twenty five so you can see that's a bit less than the maximum amount where this relates is this thing called the last month rule and last month rule is a rule relating to health savings accounts that says if you have coverage on December 1st you may contribute the maximum to your HSA regardless of how much coverage you had during the year so this is a special rule that applies and says hey you can contribute more than you otherwise could we're going to kind of grandfather you in don't worry about it contribute up to the maximum so sounds really nice and in theory you're getting something for nothing and contributing more than you could so as an example let's assume you had family coverage for

FAQ

I've gone through instructions for Form 8889 on Health Savings Accounts, and it says that I do not have to report my FSA (flexible savings account--like a HSA) distributions on it or the 1040, but what good is that? It decreases my AGI, right?
FSA money has no impact on your AGI. The funds that went into the account were not reported as income to you on your W2 and the money (distributions) you take can theoretically only be used to pay for qualified healthcare costs. You do not get to take an itemized deduction for expenses paid with FSA funds. So the FSA money just never hits your 1040 tax return in any place, unless you somehow paid for non-qualified expenses.
What is HSA (Health Savings Account) Recalculation?
A Health Savings Account (HSA) recalculation refers to the process of determining the allowable contributions a taxpayer can make in accordance with their eligibility. Essentially the IRS wants to make sure that individuals do not participate in a High Deductible Health Plan (HDHP) for a small portion of the year in order to make full contributions to an HSA, only to have them switch out to another type of health plan.To guard against gaming the system, the IRS imposes two rules:1. Partial Contributions for eligible periods. This mainly applies to partial year participants in qualified health plans. Taxpayers can pro-rate their eligible contribution amount based upon the number of months they were covered under a qualified plan. For the month to count you must be eligible as of the first day of the month. The IRS includes a worksheet on their Instructions for Form 8889.2. Last-month rule. The first point notwithstanding, if you are an eligible individual on the first day of the last month of the tax year (Dec 1st for most), then you are considered an eligible individual for the entire year. THE CATCH – YOU MUST REMAIN AN ELIGIBLE INDIVIDUAL FOR THE NEXT 12 MONTHS. This is referred to as the “testing period.” If you over-contribute as a result of failing to participate in a qualified plan not only must you recalculate your last-month rule contribution, you will also owe an additional 10% penalty on the overage.If this sounds daunting, fear not - the IRS included a full description of the contribution conditions as well as examples of the calculation in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. If you open it up you are likely to learn a bit more about HSAs, which will be to your benefit.Note – we built an app, HSA Coach, to educate users on Health Savings Accounts, as well as assist them with keeping track of contributions and withdrawals, as well as record keeping. The above sounds all very confusing, particularly as you move from employer to employer or even as your employer switches HSA providers, which happens often. We have some financial planning calculators to help plan contributions, and even compare to other employer plans, like a 401(k) [I’m a CFP® and we couldn’t help ourselves…]. Finally, we back up to Dropbox should you use that cloud service as a document storage solution. More at HSA Coach.
While deciding between getting insurance through Cobra or marketplace are HSA contributions tax free? How does it work with payroll deductions?
Visit Internal Revenue Service and search for the instructions for Form 8889.Pay attention to the rules over the limits to contributions which involve the full calendar months within an eligible high deductible health insurance program AND your full year limits, combining both your contributions and those of your employers.The employer that allows payroll deductions directed to an HSA will subtract the amount, as pre-tax dollars. To avoid double-counting, those contributions will not reduce federal income as an entry on line 26 of Form 1040.This question is put up mid-calendar year, suggesting a mid-year change in insurance. From personal experience, the major concern is the portion of the deductible already paid by the person before the job change/severance.Under COBRA, your year to date out of pocket expenses are kept as a running total. If you switch to a Marketplace plan mid-year, your deductibles reset to zero. You get no credit for $1,500 in medical expenses during the first half of the year, but begin a new, fractional year plan at zero dollars out of pocket year to date. The deductible is not pro-rated. In other words, with just four months left in the year, you need to incur the expenses of a full year out of pocket to ever see any benefit from your new plan.It is probably more likely far better to wait until open enrollment and the calendar year of your new employer than to switch. The only difference is for the very healthy who have not had any medical expenses at all so far this year.
Can I pay for my gym membership from my personal HSA account?
Yes, you can. You can pay for anything out of your HSA account.However, if you pay for your gym membership out of your HSA account you will incur a tax penalty of 20% and owe income taxes that you need to self report and pay at the end of the year via IRS form 8889.This is because currently gym memberships are not considered an expense that is eligible for favorable tax treatment that is defined within the IRS tax publication 502.But wait, there is hope!On July 25th 2018 the House of Representatives passed Bill HR 6199. Section 8 of the bill reads as follows:“Sec. 8. Certain Amounts Paid for Physical Activity, Fitness, And Exercise Treated as Amounts Paid for Medical Care Qualified sports and fitness expenses are treated as qualified medical expenses up to a limit of $500 a year for an individual and $1,000 a year for a joint return. This includes amounts paid for membership at a fitness facility, participation or instruction in a program of physical exercise or physical activity, or safety equipment for use in a program of physical exercise or physical activity.”The bill has not been taken up yet by the Senate and does include many other pieces so even if passed section 8 could potentially be altered or removed.With that type of attention already in place it is possible that Gym Memberships sooner rather than later could be an eligible expense within an HSA account.For now though it may be a better investment of resources to avoid the 20% penalty and retain the income tax advantages of HSA participation if you can and pay for that Gym membership from another account.
What should I do if I accidentally withdraw money from HSA account for ineligible expense?
According to IRS Publication 4942 –VITA/VCE Specialty Course – Health Savings Accounts, mistaken withdrawals should be treated as follows:“If amounts were distributed during the year from an HSA because of mistake of fact due to reasonable cause, the account beneficiary may repay the mistaken distribution no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake.”Side story – I couldn’t find the answer to this question in IRS Pub 969 - Health Savings Accounts or Other Tax-Favored Health Plans, Instructions for Form 8889 - Health Savings Accounts, Instructions for Forms 1099-SA - Distributions From an HSA or even using the search tool on the IRS website.  But sometimes I can’t find the matching pair to my socks either, so I wasn’t immediately discouraged.  This particular challenge inspired me to do something I hadn’t done since earning my Citizenship merit badge in the Boy Scouts: I called the federal government.  Mirroring my Boy Scout experience from long ago, both individuals I spoke with at the IRS - the first call center representative forwarded me to the second in another department - were quite pleasant and ultimately led me to the IRS tax map.  Not on the main IRS website, the IRS Tax map and some diligence on key word search terms ultimately surfaced Pub 4942 that contains the answer copied above.  I also learned a few other things, so all in all a worthwhile endeavor.  However, in both discussions the representatives said that due to recent changes my question was out of scope and that I may need to hire an outside tax professional.  As a taxpayer there seems to be a bit of irony here.  Has the tax code has become so unwieldy the agency responsible for implementing must limit the scope of “customer” service?  Sigh.Finally, if you really want to dig in to this topic, you can go to CCH.com (Commerce Clearing House), essentially the de facto standard for tax professionals to stay currentas well as locate plain language descriptions. Fee for access, of course. 
Isn't it ludicrous that the IRS couldn't answer a tax question about HSA reporting and told me to consult a tax attorney Doesn't the IRS make the rules that the tax attorneys try to follow? Why should I have to pay for that advice?
To the contrary, it would be ludicrous if you were able to get an answer from the IRS with (I presume) a phone call. First of all, as has already been stated, you got the wrong person. Guaranteed. The people who answer the phones are not the people who “make the rules that the tax attorneys try to follow.” There are two types of people — maybe three — at the IRS who would have the ability to provide the advice you were seeking. One is your auditor, if you are in the middle of an audit; and he or she is not going to advise you. (Plus, if that were the case, you woldn’t ha e been calling in the first place.) So, assuming you are not in the middle of an audit . . . You would need either: (1) an attorney from Chief Counsel’s office who works in the proper branch to deal with your issue. Problem is, he or she is not your attorney — he or she is the attorney for the Secretary of the Treasury and is not in the business of providing advice — free or otherwise — to taxpayers. Or (2) a tax law specialist (that’s a job title) — who is usually an attorney or an accountant — from the division that deals with (“makes the rules”) HSAs. You can indeed ask for, and receive, a ruling addressing your specific situation in many cases; I can’t tell if yours is one of them or not. But if it is, you would be charged several thousand dollars for that request — undoubtedly more than a tax attorney would charge you for a simple question — so you’d still be saying “why should I have to pay for that advice?”;""
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