A taxpayer has a Health Savings Account (HSA). In Year 1, they contribute $3,000. Their employer contributes $1,000. The annual limit for their coverage type is $4,150 (stated). They withdraw $500 for non-qualified medical expenses. They are 40 years old. What are the tax consequences?

HSA Rules: 1. Contributions (Emp + EE) 65 or disabled).

Area I: Individual Compliance and Planning — CPA Practice Question 35

How to approach this question

HSA Rules: 1. Contributions (Emp + EE) < Limit are tax-advantaged. 2. Qualified distributions = Tax Free. 3. Non-qualified distributions = Tax + 20% Penalty (unless >65 or disabled).

Full Answer

B.Employer contribution is excluded from income; Employee contribution is deductible; Withdrawal is taxable plus 20% penalty.✓ Correct

Employer contribution is excluded from income; Employee contribution is deductible; Withdrawal is taxable plus 20% penalty.

IRC §223. Employer contributions are excludable. Employee contributions are deductible for AGI. Non-qualified distributions are included in gross income and subject to a 20% additional tax (penalty) if the account holder is under age 65.

Common mistakes

Forgetting the 20% penalty or thinking employer contributions reduce the deductibility of employee contributions (they just reduce the remaining limit).

A taxpayer has a Health Savings Account (HSA). In Year 1, they contribute $3,000. Their employer contributes $1,000. The annual limit for their coverage type is $4,150 (stated). They withdraw $500 for non-qualified medical expenses. They are 40 years old. What are the tax consequences?

How to approach this question

Full Answer

Common mistakes

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