1099-SA for HSA increased my taxes despite Only used for Medical Expenses

[himandherr]

I just turned 65 this past March and am now on Medicare but I am using my HSA from my employer to pay my medical bills. 

I put into Turbo Tax my distributions and it raised my Federal Taxes by A LOT, even though I checked 'only used for medical expenses'??????? 

Is there something special about turning 65 that made it suddenly taxable? The whole questions about 'do i have a HDHP currently threw me off as i have medicare now and don't contribute to my HSA anymore, it is just sitting there in an account to spend. I must be missing something?

[LeticiaF1]

If your HSA distribution, money spent from your HSA account, was used to pay for qualified medical expenses it is non-taxable. 

HSA distributions used for anything other than qualified medical expenses are not only taxable, they're subject to an additional 20% penalty if you're not disabled or are under the age of 65.

After you enter your 1099-SA, we'll ask Did you spend all the money you took out on medical expenses? If you answer Yes, the entire distribution in box 1 of your 1099-SA is nontaxable.

However, if you answer No, the portion that wasn't used for qualified medical expenses becomes taxable income. This income appears on Form 8889, line 16, and Schedule 1, line 8. The 20% additional penalty, if applicable, will show up on line 17b of your 8889 and Schedule 2, line 8.

Go through your entries and make sure all the answers you entered are correct.  

Where do I enter my 1099-SA?

[himandherr · Accepted solution]

Thank you - I found my problem. You were 100% correct that it wasn’t that I was being taxed on my HSA that was causing my jump in taxes due. All your information on line items to check was awesome!

My issue was I had put in earlier all my medical deductions and when I then put in my HSA contributions it deducted that amount from my medical deductions and hence raised my tax base. A sad realization on my part but the way it works.

Thank you for your help! 

[dmertz]

When entering your medical expense under Deductions & Credits, make sure that you have included in your medical expenses paid with the HSA because TurboTax will subtract those back off to determine that ones that can be claimed on Schedule A.

[cdenorch]

Doesn't one have to enter the medical expenses to offset the 1099-SA?  I had a 1099-SA for medical expenses I was reimbursed for and did not enter those medical expenses in TurboTax.  I also had other medical expenses that were NOT reimbursed via an HSA and I entered these expenses in TurboTax.  TurboTax then deducted my HSA reimbursement funds from the latter.  My understanding is we should not enter the medical expenses on our taxes if we were reimbursed with an HSA. Isn't TurboTax forcing us to enter the HSA reimbursed funds as well to counter this subtraction?

[BillM223]

Yes, it is forcing certain taxpayers to enter the HSA reimbursed amounts in Schedule A.

"I had a 1099-SA for medical expenses I was reimbursed for and did not enter those medical expenses in TurboTax. "

Yes, TurboTax assumes that you will list all medical expenses in Schedule A, and then add insurance reimbursements. The problem is that TurboTax automatically adds the amount of expenses as shown by the sum of 1099-SA expenses to subtract them from Schedule A, i.e., just like the insurance reimbursements.  So few people itemize medical expenses any more than this doesn't seem to be much of a problem, but for the few who do use the HSA AND try to deduct medical expenses on Schedule A, as you see, this can cause issues.

A way for you to address this is to not add the individual HSA medical expenses in Schedule A, but to add up all the HSA distributions for medical expenses, and add a single medical expense for Schedule A as a Miscellaneous expense, so that it offsets the automatic entry for HSA reimbursements.

Does that make sense? The IRS won't care, and will be happy that the Schedule A numbers are correct.

[uihwki]

We withdrew money from our HSA last year. I submitted reimbursement requests for previous years medical bills (before 2024, in years where I did not itemize medical deductions).

The 1099 I got from my HSA holding company indicates it's for calendar year 2024.

When I enter the 1099 into TurboTax it assumes that I was reimbursed for 2024 medical expenses and will not let me deduct any of our 2024 medical expenses (cancels out our medical expenses on form 8889). Our 2024 medical expenses, which I have not taken from our HSA,  would allow us to exceed the standard deduction and would reduce our tax bill.

If I don't enter the 1099 into TurboTax I assume it will get flagged by the IRS.

Anything I can do to get Turbo Tax to recognize this HSA reimbursement was for years prior to 2024?

[dmertz]

@uihwki , as stated earlier in this thread, when entering medical expenses in the medical-expense deduction section of 2024 TurboTax, you must enter all medical expenses paid in 2024, including any amount distributed form the HSA to pay qualified medical expenses.  If you like, you can enter that amount as a lump sum as other medical expenses rather than breaking it down by type of expense.

[BillM223]

Yes, if you don't enter the 1099-SA, you run the risk of the IRS sending you a letter wondering where that form is, and letting their imagination run wild on how much tax you owe because of it.

As you see, when you enter the 1099-SA, TurboTax assumes that you are reimbursing medical expenses that you entered this year.

So let's try this: enter a Miscellaneous item in the Medical Deduction section. Make the description "HSA adjustment" and make the dollar amount equal to the distribution amount on the 1099-SA. I assume that you did not enter ANY medical expenses in your 2024 return that was reimbursed by this 1099-SA distribution? I.E., that the Miscellaneous entry is not duplicating anything you have already entered?

Now TurboTax thinks that all of your medical expenses were made in 2024, so the automatic subtraction that TurboTax makes won't artificially reduced the amount of real unreimbursed medical expenses you paid this year (well, 2024).

If this works for you, just remember that lying to TurboTax is not the same as lying to the IRS - Make a note of what you did and why so that in case any one ever asks (which I highly doubt), you can remember why you did it.

Come back and tell me if this doesn't work for you.

[uihwki]

That solved the problem.  Thanks for your help.