"As an aside, we over funded our HSA, I estimated what we would have overfunded and took out about 60 more dollars than we overfunded, Turbotax is also not letting us put in what we took out (we overfunded by about 940, but I took out 1000). Shouldn't we have to pay taxes on the 60 dollars we took out?"
We discourage taxpayers from removing excess HSA contributions because it is difficult for them to correctly determine the actual excess.
The HSA is not a savings account that you can willy-nilly withdraw money from. Instead, when you took out the $1,000, you withdrew an excess of $940 (if this is what TurboTax told you in the HSA interview), and you also requested a distribution of $60 for reasons other than reimbursement for medical expenses. This $60 should be added to Other Income when you enter the corresponding 1099-SA, so not only will it be taxed, but it will be penalized 20%, because you should not withdraw money willy-nilly from the HSA, as I said.
When the 1099-SA arrives, you will probably have to add a second 1099-SA. The "real" 1099-SA will have a distribution code of '2' in box 3. Enter this 1099-SA as is.
Then add a second 1099-SA, with box 1 of $60.00, box 3 of '1', and after you enter this, when TurboTax asks is any of this distribution was used for medical expenses, answer "no". The $60 will be added to Other Income and you will be penalized 20% of the $60 on top of that.
The ONLY way around this is to see if you have unpaid medical bills sitting around for $60.00 or more. Then make your self a note that you withdrew this $60 to reimburse yourself for that bill, and stick the note in your tax file, in case anyone ever asks.
OK?
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