I’m a recent grad, started working this summer, and have a health insurance plan with an HSA option. My employer matches about $1,000 to my HSA, and I’ve also contributed over $1,400 myself.
My parents mentioned they want to claim me as a dependent for tax credits (Child Tax Credit and American Opportunity Tax Credit), and I’m wondering if that could cause any issues for my HSA or taxes.
My main questions are:
Are there penalties if I’m claimed as a dependent but also contribute to an HSA?
Could I ask my parents to skip claiming me as a dependent?
If I fill out a “Removal of Excessive Contribution” form, what happens to any growth in my HSA and the employer match?
When did you start working? Have you provided more than half of your support this year? If so, your parents can’t claim you.
If you haven’t provided over half your own support, then you aren’t eligible for HSA contributions. You’d need to stop HSA contributions and pull out any funds you put in. Contributions done through payroll would also count as taxable income. The earnings and employer contributions would be taxable, too. You’ll need to pull everything out and report it as income.
Here’s the info on that, Form 8889 instructions, page 8, about “Excess Contributions” and “Excess Employer Contributions.”
By the way, your parents likely benefit more from claiming you than you’d benefit from keeping the HSA contributions. Regardless of if they claim you or not, if you’re eligible to be claimed, you’re not eligible for HSA contributions.
@Fifer
I started working in July. Before that, I was covering my tuition, rent, etc., through scholarships and part-time work. After graduation, my parents did help with moving expenses. Not sure if I provided more than half of my support or if it’s a close call.
Would the tax credits my parents would get be more valuable than my HSA benefits?
Bryn said: @Eli
The test is whether you provided more than half of your support, not if your parents did. Scholarships count as support from others, not you.
Actually, under section 152(f)(5), scholarships don’t count in total support. This can make it easier for parents to claim a dependent.
@Eli
Did you go back to live with your parents after graduating? Where were you between graduation and moving into your apartment, and when did you actually move?
Davi said: @Eli
Did you go back to live with your parents after graduating? Where were you between graduation and moving into your apartment, and when did you actually move?
I graduated in May and moved to my own place on July 1. My parents helped with some of the move-in costs like the first month’s rent and security deposit.
@Eli
What’s your total income this year? Dependents can only earn so much and still qualify as dependents.
Also, an HSA can be valuable in the long run, especially with an employer match and tax savings. If you plan to use it for retirement rather than health expenses, that could be worth considering.
Another thing: dependents get a standard deduction of $1,300. For others, it’s $14,700.
So, depends on your parents’ income, their tax benefits, and yours.
@Aeron
Since I’m under 24, I’d qualify as a “child” so the income limit doesn’t apply. Also, I’m using the HSA for investing, not health expenses. Am I right about the income limit?
Eli said: @Aeron
Since I’m under 24, I’d qualify as a “child” so the income limit doesn’t apply. Also, I’m using the HSA for investing, not health expenses. Am I right about the income limit?
Yep, the income limit is only for qualifying relatives, not qualifying children.
The IRS says a child has to meet one of these by the end of the year:
Under 19 and younger than the taxpayer
A full-time student under 24
Permanently disabled anytime in the year
If OP graduated and isn’t a student now, then they don’t count as a full-time student. So unless OP is under 19, they’re in the ‘qualifying relative’ category.
@Aeron
No, they just need to be a student for 5 months in the year, even if they graduated in May. So if OP started their last semester in January, they’re a student for the whole year for this purpose.
Did you graduate from a 4-year college? If so, did your parents use the AOTC every year you were in school? The credit’s only for the first 4 years of higher education and only applies 4 times.
And, did your parents cover the costs or was it you through scholarships and work? Are you fully independent now (paying rent, etc.) or living with your parents?
Publications 501 and 970 can help figure out who can claim who and what’s available for students.