Error in FreeTaxUsa with last month rule

divtaxes
divtaxes Newcomer
in Credits/Deductions

I am going through the HSA questions and I've selected this scenario for the HSA questions:

2025 tax year:

January - May: HDHP self-only coverage

June-Dec: No HDHP coverage

2024 tax year:

January - December: HDHP self-only coverage

However, the software is flagging that I am in violation of the last month rule and need to be taxed on my 2024 income, which doesn't seem correct since I was on the HDHP the whole 2024 year, so the last month rule doesn't apply. Is there a workaround for this in the software?

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Answers

  • CoryF
    CoryF image
    Hello,

    The software is calculating correctly. When you use the last-month rule for 2024, the IRS requires a testing period that runs from December 1, 2024 through December 31, 2025. Because you lost HDHP coverage in June 2025, you did not complete that testing period. The contributions that were only possible because of the last-month rule must be included in your 2025 income, plus a 10% additional tax. This is reported on Form 8889, Part III.

    If you contributed only the prorated amount for 2024 rather than the full annual maximum, you may be able to adjust your entries to reflect that and avoid the penalty.

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