1. Good, no 20% penalty
2. Yes, any Medicare (Parts A, B, D, Advantage) disqualifies contributions to your HSA.
3. If you are both 55+ and you both have HSAs as I think you said, your limit is actually 9750, BUT while the 7,750 is shared between the two of you, the "bonus" 1,000 must go to the HSA of the person who is 55+ - in this case, each of you. That is, if you are considering just one of you, the max is 8,750, with 1,000 going to the other HSA.
4. Yes, employers continuing to contribute is not uncommon.
5. If you contributed 8,750 (it was never clear to me how much you actually contributed), then the TurboTax calculations which allocated the Family 7,750 to one or the other of you) in effect allocated this 2,153 to your wife's HSA. This is why your calculated excess was only 703, and not the 2,153 that you calculated.
Remember that the Family contribution limit treats the two HSAs as a single "virtual" HSA in order to minimize the excess.
6. So, 5,500 to your spouse's HSA and 4,953 to your HSA, is that right? If we allocate 8,750 to one HSA (out of your Family limit), then that leaves 1,703 in contributions (out of your total 10,453 in contributions) needing to be covered. However, the entire Family amount of coverage is used up, so all you have left if the 1,000 "bonus" to the other HSA. So you end up with an excess of 703, all told. It is up to you to get the correct dollars to the correct HSAs, but as for as TurboTax is concerned, it has calculated the smallest excess possible for you.
7. You have not calculated the excess correctly, as you would find out during an audit. You should review what I wrote above.
So what you have done is withdraw (1) your excess contributions of 703 and (2) withdraw 1,450 for reasons other than for qualifying medical expenses. As such, if you can't find current medical expenses to apply that 1,450 to, TurboTax will add that 1,450 back to income as well as penalizing you 20%. Alternatively, you can see if your HSA custodian will accept your request that the 1,450 was a Mistaken Distribution, and let you send those dollars back to the HSA.
8. #6 above shows that your excess is 703, no matter what you want it to be. TurboTax is working correctly and following the IRS instructions.
9. TurboTax understands your situation perfectly well, you need review the IRS instructions, and what I have written above.
10. Thanks for the version ID. I believe all the versions would handle this the same way, but sometimes we are surprised.
Of course, it's your tax return and you are signing it. We tax professionals (Enrolled Agents, CPAs, and tax attorneys) are giving you the best advice possible.
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