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If my HSA distribution is all a qualified medical expense, why is the distribution showing up as taxable income?
Is there a bug in the software?
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As you have probably read, when you add the distribution on the 1099-SA, your distribution is temporarily added to Other Income, because by default, the IRS considers the distribution to be taxable income until on the next screen you tell TurboTax that the entire distribution was for qualified medical expenses.
However, TurboTax does not remove the distribution from Other Income until the next screen after that, and it is possible that if you jump away from the HSA interview too quickly on that next screen, the recalculation (removal of Other Income) never takes place.
It can happen that TurboTax can hold on to amounts even when you think you have deleted them. This is an example. Once the recalculation doesn't take place, the Other Income doesn't ever go away, even when you repeat the HSA interview.
So you need to delete all your HSA information from your return(see below) and then restart your HSA interview. Please make sure that you go to the end of the HSA interview so that all the proper calculations and recalculations are done.
***Delete HSA Information***
The safest - although brute force - way to fix this is to do the following in this order:
1. make a copy of your W-2(s) (if you don't have the paper copies)
2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen
*** Desktop***
3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.
*** Online ***
3. go to Tax Tools (on the left), and navigate to Tools->Delete a form
4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one)
5. go back and re-add your W-2(s), preferably adding them manually
6. go back and redo the entire HSA interview.
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1. Click into your return.
2. Click Online and select "Send Tax File to Agent".
3. This will generate a message that a diagnostic copy will be created. Click on OK, the tax file gets sanitized and transmitted to us.
4. Please respond with the Token Number that was generated.
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Do us a favor and do what TurboTaxHols told you to do first. Then if you haven't updated your software (at the top, click on Online, then Check for Updates). Then reopen your return, delete your HSA information, and try it again...and then please come back and tell us what happened.