Part 1 Adjustments to Income question: tax

Part 1Adjustments to Income

Pia, 45, took $2,000 from her HSA in 2025 for a vacation. What is the tax result?

A $2,000 is income plus a 10% additional tax
B $2,000 is income with no additional tax
C $2,000 is income plus a 20% additional tax
D No tax if she repays it within 60 days

Show the answer and explanation

Answer: C. $2,000 is income plus a 20% additional tax

HSA distributions not used for qualified medical expenses are included in income and, unless the account holder is 65, disabled or has died, are subject to a 20% additional tax (not the 10% that applies to retirement plans). Pia owes tax on $2,000 plus $400. A distribution made by mistake can be returned, but a vacation is not a mistake. Source: IRC 223(f)(2), 223(f)(4); Pub. 969 (2025), Distributions From an HSA. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Applying the 10% retirement-plan rate to HSA distributions.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.