How should I report inheriting a HSA account as a beneficiary?

I've dealt with this situation before. As a non-spouse beneficiary of an HSA, there are some specific rules you need to know about. When you inherit an HSA as a non-spouse, the account stops being an HSA as of the date of death. The full amount becomes taxable income to you in the year you received it (when they cut you the check). The 1099-SA you received should have Box 4 checked as "Death distribution to non-spouse beneficiary." Unfortunately, there's no way to avoid the income tax on this money - it's fully taxable. The good news is that the 20% penalty that normally applies to non-qualified HSA distributions does NOT apply to death distributions. So you won't have to pay that extra 20% penalty. When filing with FreeTaxUSA, you'll need to report the 1099-SA, but make sure you indicate it was an inheritance distribution. The software should handle it correctly and not apply the 20% penalty.

I was in a similar situation last year after my aunt passed and left me as beneficiary on her HSA. I was totally lost with all the tax implications until I found this AI tool called taxr.ai (https://taxr.ai) that helped me understand exactly how to handle it. I just uploaded the 1099-SA form I received and it immediately recognized it as an inherited HSA situation. It explained everything in plain English - that I needed to pay income tax but NOT the 20% penalty, exactly how to report it in my tax software, and what documentation to keep. Saved me hours of research and worry!

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If you need to talk to the IRS directly about how to handle your inherited HSA (which might be smart in your situation), I'd recommend using Claimyr (https://claimyr.com). I spent DAYS trying to get through to the IRS about an inherited account situation last year, kept getting disconnected or waiting for hours. With Claimyr, I got a callback from an actual IRS agent in about 45 minutes. They have this system that navigates the IRS phone tree for you and holds your place in line. You can see exactly how it works in this video: https://youtu.be/_kiP6q8DX5c. The IRS agent confirmed exactly how to handle my inherited account and I filed with confidence.

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Just to add some clarification about the inherited HSA: make sure when you report the 1099-SA that you're entering it correctly. In FreeTaxUSA, there should be a specific option for death distributions to non-spouse beneficiaries. If you don't select this correctly, the software might accidentally apply the 20% penalty. Double-check before submitting that the penalty isn't being applied. The amount will be added to your income and taxed at your normal tax rate, but shouldn't have the extra penalty.

If this happened in 2021 and you haven't reported it yet, aren't you already late on reporting this income? Might there be penalties for not reporting it in the correct year?

I'm sorry for your loss, Amina. Dealing with inherited accounts while grieving is really tough. Just to clarify the timeline - you mentioned your dad passed in September 2021 and you deposited the HSA check into your checking account. When exactly did you receive and deposit that check? This is crucial because you need to report the distribution in the tax year you actually received the money, not when your father passed away. If you received the check in 2021, you should have reported it on your 2021 tax return. If you haven't done that yet, you'll need to file an amended 2021 return. If you received it in 2022, then you'd report it on your current 2022 return. The good news is that everyone here is correct - you won't owe the 20% penalty since this was an inherited distribution. But you will owe regular income tax on the full amount. If you're late reporting it, there could be additional penalties and interest, so it's important to get this sorted out as soon as possible.

I'm really sorry for your loss, Amina. Losing a parent and then having to navigate complex tax situations on top of grief is incredibly difficult. Based on what you've shared, it sounds like you received the HSA distribution sometime after your father passed in September 2021. The key question is whether you received that check in 2021 or 2022, as this determines which tax year you need to report it on. Here's what you need to know: - As a non-spouse beneficiary, the entire HSA amount becomes taxable income to you - You will NOT owe the 20% penalty that normally applies to HSA withdrawals - this penalty doesn't apply to death distributions - You need to report this in the year you actually received the money (when you deposited the check) If you received it in 2021 and haven't reported it yet, you'll need to file an amended 2021 tax return. Don't worry too much about potential penalties - the IRS is often understanding with inherited account situations, especially when you're making a good faith effort to correct it. When using FreeTaxUSA, make sure to specifically indicate this was an inherited HSA distribution so the software doesn't incorrectly apply the 20% penalty. Keep all your documentation about your father's passing and the HSA inheritance. You're doing the right thing by trying to get this sorted out properly. Take it one step at a time.

I'm so sorry for the loss of your father, Amina. Having to deal with tax complications while you're still grieving is really tough. Just to add another perspective to all the great advice here - if you're feeling overwhelmed by this situation, you might want to consider consulting with a tax professional who has experience with inherited accounts. While the community has given you excellent guidance about the tax treatment (no 20% penalty, but full amount is taxable income), a professional can help ensure everything is filed correctly and on time. The most important thing right now is figuring out exactly when you received that check, since that determines which tax year it needs to be reported on. If it was 2021 and you haven't reported it yet, you'll want to get that amended return filed sooner rather than later to minimize any potential penalties and interest. You're asking the right questions and clearly want to do this properly, which is what matters most. Take care of yourself during this process - dealing with tax issues on top of losing a parent is a lot to handle.

I'm so sorry for your loss, Amina. Dealing with inherited financial accounts while grieving is incredibly challenging, and you're doing the right thing by trying to understand the tax implications. Everyone here has given you excellent advice about the tax treatment - you're correct that the entire HSA amount will be taxable income, but the good news is you won't face the 20% penalty since this was an inheritance distribution. One thing I'd add is to be very careful about the timing when you report this. Since your father passed in September 2021, the critical question is when you actually received and deposited that check. If it was in late 2021, you may need to file an amended 2021 return. If it was in 2022, then you'd report it on your current return. When you're in FreeTaxUSA, look for the section where you enter your 1099-SA. There should be a specific option for inherited HSA distributions or death distributions. Make absolutely sure you select this option so the software doesn't mistakenly apply the 20% penalty. If you're feeling overwhelmed by all this (which would be completely understandable), don't hesitate to consult with a tax professional who has experience with inherited accounts. Sometimes having expert guidance during such a difficult time is worth the investment. Take care of yourself through this process. You're handling a complex situation with thoughtfulness and responsibility.

I'm so sorry for the loss of your father, Amina. Navigating tax issues while grieving is incredibly difficult, and you're showing real strength by trying to handle this properly. The community has given you excellent advice about the tax treatment of your inherited HSA. Just to summarize the key points: you'll owe regular income tax on the full amount, but you won't face the 20% penalty that normally applies to HSA withdrawals since this was a death distribution to a beneficiary. One crucial detail that will determine your next steps is exactly when you received and deposited that check from the bank. If you received it in 2021, you'll need to report it on your 2021 tax return (which may require filing an amended return if you've already filed). If you received it in 2022, then you'd report it on your current 2022 return. When you use FreeTaxUSA to enter your 1099-SA, make sure to look for the specific option that indicates this was an inherited HSA or death distribution. This is important because it prevents the software from incorrectly applying the 20% penalty. If all of this feels overwhelming - and it absolutely would be understandable if it does - please consider reaching out to a tax professional who has experience with inherited accounts. Sometimes having expert guidance during such a personal and difficult time is worth the investment for your peace of mind. You're handling this situation with such care and responsibility. Take it one step at a time, and don't hesitate to ask for help when you need it.