Can I withdraw from my HSA the 7.5% of AGI that isn't deductible, when I itemize my medical expenses?

[jsspauld]

I currently have fairly large medical expenses as I'm under 65 and retired.  I pay out of pocket for medical expenses for me and my wife.  I itemize Schedule A on my taxes because with mortgage interest, property taxes and medical expenses, it is well above the Standard Deduction.  My question is - the 7.5% of AGI that I cannot deduct on my Schedule A - can I then withdraw that tax-free from my HSA as a reimbursement of medical expenses paid?  If I cannot, then I feel like I'm losing money from itemizing because I could withdraw the full amount of my medical expenses from my HSA, but am "penalised" by deducting on my taxes due to the 7.5% floor. 

[MindyB · Accepted solution]

No, you cannot.  You can split up the HSA and medical expenses, but that 7.5% floor cannot be made up of any money that was pulled from an HSA. It must only be an expense paid with after-tax money.

It sounds like using the HSA reimbursement may be the better option for you, depending on the amount of medical expenses you have and your AGI.  I would suggest entering both ways separately to test this, to be certain you choose the most beneficial option for yourself.

See: Publication 502

[jsspauld]

Currently I can pay out of pocket to let my HSA grow, and I'm documenting all my out of pocket expenses.  My AGI is ~$165,000, so 7.5% = $12,375.  That amount of medical expenses is then not deductible, nor reimbursable through my HSA?  That doesn't seem fair, because I would not be double dipping if it isn't allowed due to the 7.5% floor. 

[dmertz]

To be tax free, distributions from the HSA must be applied to qualified medical expenses, making them reimbursed expenses.  Because the amount of your medical expense deduction depends on the amount of unreimbursed medical expenses, your medical expense deduction would be reduced (but not below zero) by any tax-free distribution made from the HSA.   See the caution above line 1 of Schedule A.

This can also be said the other way around.  An amount included on Line 1 of Schedule A is not permitted to have been paid from an HSA.  Including an expense on line 1 and paying it from an HSA would indeed be a prohibited double application of the expense.