I disagree with Bill that the problem is the IRS. The problem is TurboTax, which assumes that taxpayers are idiots. TurboTax doesn’t just ask you to list all of your deductible medical expenses. TurboTax asks you to list all of your medical expenses, and then to list all of your tax free reimbursements such as health insurance, and then TurboTax automatically subtracts your HSA reimbursements whether they were for the current year or not, and then TurboTax does the calculation to determine the remaining amount of medical expense deduction.
I agree that the remedy is to add an additional medical expense to offset the amount of the HSA reimbursements that were for prior year medical expenses.
However, if you took a tax deduction for those medical expenses in the prior year and received a tax benefit from the deduction, the fact that you are now obtaining reimbursement from an HSA makes the HSA reimbursement taxable income to you as a taxable recovery, which is another name for a reimbursement of a previous deduction. You can’t both take a tax deduction for an expense and also be reimbursed tax free for that expense, even if the reimbursement crosses a tax year. If you must enter the reimbursements as a taxable recovery, that is under the “other income“ or “uncommon income“ section of the program. If you did not take a tax deduction for your medical expenses in the previous year, then you do not have a taxable recovery.
