Don't watch the Refund Meter too closely.
When you added the 1099-SA, that amount, according to the IRS, is taxable until you indicate that it was for qualified medical expenses. Go all the way to the end of the HSA interview and see if that amount is still in Federal Tax Due.
Hi Bill,
Thanks for the reply.
I checked the box indicating the funds were used for authorized medical expenses. I also checked the form (used the turbotax "View pull down tab") to see the the box on 1099-SA in turbotax has the box checked indicating the funds were used for qualified medical expenses (it is checked).
I am basically done with my taxes (all data entered and can submit).
I decided to do one last review. I changed the HSA distribution amount to see if it influenced my MAGI. I reduced the HSA distribution I received drastically. I figured the amount of tax owed should not change. It did (taxes owed go up when I increase the HSA distribution, and go down when I decrease the distribution). MAGI does not change.
In the "Summary form", it looks like I might owe a tax penalty. Increasing the HSA distribution also increases the tax penalty. Seems like my HSA distribution from 1099-SA is being treated as taxable income. Maybe I'm pressing (or not pressing) the correct button?
Any thoughts??
Thanks!
Hi Bill,
A few more clues:
1) I looked at form 8889-T in turbotax. Line 16 shows 0 Taxable HSA distributions.
2) This is my only HSA and only has distributions in tax year 2023.
Thanks again for any thoughts.
If your HSA distribution was being treated as taxable income, it would appear on that same line 16 (8889), as well as on Line 8f on Schedule 1 (1040).
Anything on 8f?
Do you have a 5239? Did you have excess contributions to your HSA? Do you want a crystal ball?
Nothing on Form 1040 Schedule 1 line 8f .
I don't see Form 5239.
I have no excess contributions to my HSA.
A crystal ball could come in handy. Do you have one in working order? 😉
OK, tell me again why you think that adding the HSA distribution increased your federal tax due by $250, because, no, this doesn't make sense.
I have all data entered into turbotax and am at the point where I could file it (at the e-file screen). I assume all calculations are done at this point.
I go back to the section where I entered my HSA distribution (shown on form 1099-SA Box 1).
I reduce the amount of the distribution from about $2700 to $5. The Federal Tax Due increases.
I tried progressing with each amount ($2700 and $5) to the point I am about to file thinking maybe the Federal Tax Due would change as turbotax needed to do another calculation to figure the Federal Tax Due. It does not matter. With the lower $5 distribution entered, I owe less.
Odd, huh.
OK, this needs some detective work, because changing the amount of the distribution for qualified medical expenses should have no impact on your federal taxable income, and hence, on your federal income tax.
So could you look at lines 1 through 15 on your 1040 and figure out which line is changing when you change the amount on the 1099-SA? We'll just have to backtrack from there.
Yes, I was thinking the same thing (need to go line by line).
I think I found the cause: If you go through the math/worksheets to compute Schedule A line 1 (see "Schedule A Line 1 Medical Expenses Worksheet"), they subtract the amount distributed from your HSA (Line 13B of the Worksheet). This leads to reducing the deduction on 1040 Line 12. I suspect I need to go back through medical deductions and see if I can enter the items I used the HSA funds for.
Thanks for letting me know I was not "out in the weeds" thinking HSA distributions used for qualified medical expenses are non-taxable. 😉
Aha! This is a very little known feature of TurboTax. When you enter a 1099-SA for qualified medical expenses, TurboTax creates an entry that subtracts this amount from expenses you have entered into Schedule A.
To deal with this, you enter a miscellaneous medical expenses in your Schedule A, where the description is "HSA adjustment", and the amount is equal to the total of the 1099-SA amounts for qualified medical expenses. When you go through the Schedule A interview, you may see a screen that refers to this, although it may not have meant much at the time.
OK, so after you have done this and after you have gone back and set the 1099-SA distribution to what it should be, please review your Schedule A.
Sorry to have not caught this, but it getting rarer and rarer that someone both has an HSA and enough medical expenses to exceed the 7.5% limit for medical expense and is also able to beat the Standard Deduction.
Thanks for the follow up.
If I understand your note, your suggesting adding a "misc expense" to offset the HSA amount (Scheule A will add the "1099_SA amount" as a Misc expense, and then subtract it out on line 13b and eliminate any impact on my taxes owed).
I went through the interview again as you noted, and didn't find a screen referring to adding an adjustment.
Looking in turbotax-help to see if I could find how to enter an "HSA Adjustment" I found the following:
"The IRS won't let you deduct medical expenses paid with HSA or MSA funds. Those funds are already tax-free and deducting them as medical expenses would be double-dipping"
Any thoughts?
Let me rephrase what I said...TurboTax is going to subtract the amount of your HSA distributions from what you enter as medical expenses. This is because TurboTax assumes that you will list ALL of your expenses. Then, of course, you will enter any insurance reimbursements, and you don't have to list HSA reimbursements because TurboTax will do it for you.
Over time, I have come to realize that most taxpayers list ONLY the medical expenses that have not been reimbursed by insurance or other sources. And that would be fine - except that TurboTax is automatically apply the HSA reimbursements.
So you HAVE to list any expenses on Schedule A that were paid by the HSA. This is why I suggested making a miscellaneous entry for the total of HSA expenses - not that they will be deducted but to avoid the automatic HSA handling on Schedule A from having a negative effect on your return.
Can you see your output forms? Look for Medical Worksheet - this will show you what's happening.
So you did not see this screen late in the Medical Expenses interview?
To be fair, this is from the desktop version of the software. I don't know what the Online version looks like.
Thanks for the reply.
I think I am doing what you are suggesting. Let me "quiz myself" and you can correct me.
Example:
I have $8700 of medical expenses that equal all out of pocket expenses (and assume this is over the 7.5% limit). The $8700 does not include what the insurance paid directly to providers (it is just my expenses). I have no reimbursements from insurance companies.
I pulled $2700 out of my HSA to cover part of these, so the other $6000 came out of my pocket (non-HSA funds). Note (I think this is key): The HSA funds came directly to me (did not go to the provider). I first paid the provider out of my pocket at the counter, and then reimbursed myself with the HSA funds (just moved them from the HSA account to my checking account). The HSA funds did not go to the provider from my HSA account.
I enter all of this into turbotax. $8700 expenses entered prior to the window you shared in your screen shot. The $2700 HSA entered in where turbotax takes in the HSA distribution shown on the 1099-SA form. This $2700 also automatically appears on line 13b of the Worksheet.
When I look at the "Medical Expenses Worksheet", lines 1 to 11 show all $8700 in expenses, and sum to $8700 on Line 12. Row 13b shows the $2700. Row 14 shows $6000 and this goes to Schedule A line 1.
Sound correct?
Yes, it sounds correct.
Doing it the reimbursements this way (you pay medical provider out-of-pocket, then contact the HSA custodian to get a distribution to cover that amount) is fine, but it does put the burden of record keeping on you, because you have to (1) show that you paid those expenses and (2) you have to show which distribution (or which part of which distribution) from the HSA went to reimburse you for which expense. Fortunately, there does not have to be a one to one relationship here.
This is why most HSA owners get a debit card, so that they can directly pay medical expenses from the HSA. Because of the way the debit card is implemented, you can't use it to pay for non medical items - the card reader generates an error code.
However, either way is fine.
Thank you for your patience and coaching. I appreciate it.
One interesting thing I learned. I think I would have been better not using HSA funds in 2023.
In the example, if I would have paid all $8700 out of pocket (not using any HSA funds), the total on the "Medical Expenses Worksheet" Line 14 would have been larger (and Schedule A Line 1 as it is the same value). This would provide a larger deduction lowering my tax bill. If this is correct, it makes sense why when I reduce the HSA amount, my "Federal Tax Due" is lower (the larger deduction lowers my tax bill).
Guess I could have used a better crystal ball to predict my 2023 taxes. 😉
I have a similar problem for 2024.
The HSA distribution was to close my HSA account and I have documented more than enough expenses from previous years to cover the amount.
The problem is that Turbotax automatically assumes that the distribution was for the current tax year and makes no provision for it being for expenses incurred in previous years.
When I follow the advice above, it sets my Federal taxes correctly. BUT it changes my state taxes (California) and I cannot fix it.
Hello,
I don't have State income taxes, so I didn't have to deal with that. If you don't see another answer, you might have to start another question (post). It would be nice if TurboTax would add features & comments to help guide with this.
My take-away (learning) was to be careful how I use HSA funds.
Good luck.
clschaaf
Yes, TurboTax automatically assumes that all medical expenses were paid in the current year. The IRS introduced a conundrum when they said that you could repay yourself for older medical expenses, so long as they were incurred after the start of the HSA.
As you see, TurboTax automatically adds back the entire 1099-SA amount that is used for medical expenses.
But since CA surely allows only current year expenses. So do this:
On the screen that says "Here's the Income that California handles differently", go to the bottom and click on "Other Adjustments to Income".
Here you can do the necessary adjustments. Remove the multi-year distribution and subtract out the current year medical expenses.
The amount of the 1099-SA that was actually for medical expenses will appear on line 4 in Part II as an addition. If you want to remove only the current year expenses, then take the difference of the current year expenses in that 1099-SA and the prior year expenses, and enter them as a subtraction, so that the prior year medical expenses will not appear as a current year expense in CA,
I hope that makes sense.
@clschaaf
Thank you Bill!
I followed the steps you suggested on March 15, 2024 11:11 AM.
("enter a miscellaneous medical expenses in your Schedule A, where the description is
"HSA adjustment", and the amount is equal to the total of the 1099-SA amounts for qualified medical expenses.")
This seemed to correct my Federal tax due. At the same time, it increased my CA refund. I believe that's proper since California doesn't tax the HSA distribution. I seem to remember that CA also doesn't give a reduction in income for HSA contributions.
For context - I contributed to the HSA for 10+ years, never taking a distribution. In early 2024, I closed the account, making sure that I documented enough previous year medical expenses to exceed the account balance. In case I get audited, I have the documentation.
The 2024 medical expenses I entered were all out of pocket and not reimbursed by the distribution.
Do I still need to perform the CA adjustment to income and add the HSA amount as an addition? Doing so will reduce my CA refund.
(I thought about editing the 1099-SA and changing the amount to zero, but I figured the IRS wouldn't like that and trigger an audit. I also attempted to override line 13b to zero on the Schedule A worksheet, but TurboTax called it an error). This does appear to be a gap in functionality.
"I believe that's proper since California doesn't tax the HSA distribution." - True
"I seem to remember that CA also doesn't give a reduction in income for HSA contributions." - Also true
"making sure that I documented enough previous year medical expenses to exceed the account balance." - you mean expenses for 2023?
"Do I still need to perform the CA adjustment to income and add the HSA amount as an addition? " When you look closely, you will see a number of items concerning HSAs that TurboTax automatically adjusts on the CA return. By and large, you should leave these alone.
But you are referring specifically to the 1099-SA that was the distribution to close the HSA? Did you tell TurboTax that the distribution was for medical expenses or not?
Well. the amount that was for medical expenses ends up nowhere on the federal return on but is on Line 4 on Part II on Schedule CA. The amount that was not for medical expenses ends up on line 8f Schedule 1 (1040). but on Schedule CA in Part I schedule B, line 8f.
I think that whatever you did with the distribution, you should leave those alone.
"I also attempted to override line 13b to zero on the Schedule A worksheet, but TurboTax called it an error). This does appear to be a gap in functionality." - Why?
"previous year medical expenses" was a typo. It should have been "previous years".
Since I never took any distribution when I was contributing, I had multiple years worth of medical expenses that I documented that more than offset my final distribution. None of those expenses were from 2024.
Yes, I told TurboTax that the entire distribution was for medical expenses.
The fact that TurboTax automatically populates line 13b is the gap. It should not automatically assume the distribution applies to current year medical expenses. There should be an additional question regarding whether it's for current and/or previous years.
The workaround that you suggested worked, but without reading your answers, I wouldn't have figured it out. I would have overpaid Federal and received a smallerr CA refund.
Thanks for your time and expertise.