"should I use 7100 or 5550 as taxable income? I’m guessing it should be 7100. Correct?"
No, let TurboTax be your guide.
You will need to do the HSA interview, that group of screens related to HSAs. To get there, do a Search (upper right) for hsa and click on the jump-to link (Mac users must find HSA in the Topics List).
On the first screen check off who had an HSA (the HSA belongs to the individual so each of you could have had one).
Proceed through the HSA interview. On the screen where it asks "Did [name] have HDHP coverage at any time during the year?", answer NO. This is because the existence of the FSA conflicted with the HDHP coverage so it's as if you didn't have any.
Shortly thereafter, TurboTax will tell you that you have a $7,100 excess contribution, and how much will you withdraw by May 17th (assuming that they do what they did last year when the due date was extended).
TurboTax will automatically add the $7,100 to line 8 on Schedule 1 (1040) so please do not enter this amount yourself any place on the return.
Are you saying that you have already withdrawn the $5,550? Did you tell the HSA custodian that this was for "excess contributions"? This is important so that the HSA custodian will do their paperwork correctly.
OK, tell TurboTax that you will withdraw $5,550 by the due date of the return.
Then the HSA should send you a check for the $5,550 plus any earnings associated with it. At the end of 2021 or in early 2022, you will get a 1099-SA with a distribution code of 2 and the amount of earnings in box 2, which you will enter into your 2021 tax return.
As for the rest of the $7,100 ($1,550?), this will carryover as an excess contribution to 2021. Form 5329 will be added to you and you will be penalized 6% of the $1,550.
For 2021, you will have to decide what you are going to do (well, have already started).
If either one of you is covered by a general-purpose health FSA, then you cannot contribute to an HSA. This is because if one spouse has the FSA, the other spouse cannot opt out of it (unlike regular health insurance where you could choose to add in your spouse or kids).
I do not know when sign-up dates are for the FSA, but if you can terminate the FSA at some point during the year, you may be able to enjoy HDHP coverage without the conflicting coverage which would permit you to contribute to the HSA.
If you do resume HDHP coverage in the future with no conflict, then you will be able to "use up" that carryover by applying it to the annual contribution limit. That is, you would reduce your regular contributions by $1,550 so that your regular contributions plus the carryover would come in under the $7,100 (or whatever the limit is for that year).
OK?
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