As you probably know, you can take a distribution at any time to reimburse yourself for prior-year medical expenses paid with out-of-pocket dollars, so long as you were in the HSA when you incurred the expenses.
However, this distribution, if taken in 2016, is a 2016 distribution, no matter what year the original expense is in.
I assume that when you say "Turbo tax is deducting the distribution amount from current year reported medical expenses", that you are referring to the fact that TurboTax is subtracting your HSA distribution from the medical expenses you listed in Medical and Dental expenses for Schedule A.
It's not obvious in TurboTax, but the software wants you to enter all expenses in Schedule A. It then asks you for your insurance reimbursements so it can subtract them, and it also automatically subtracts your HSA distributions.
So to make everything work out in TurboTax, go ahead and enter your prior-year medical expenses that the 2016 HSA distribution was used for so that they will cancel each other out, and the HSA distribution doesn't cause some real 2016 expense to be not properly deducted.
