Why is my HSA
distribution taxable?
HSA
distributions (money taken from an HSA account) are nontaxable, but
only if the money is used to pay for qualified medical expenses. If the money is used for anything else, it's
taxable.
After
you enter your 1099-SA form, you'll be asked Did
you spend all the money you took out on medical expenses? (This
refers to the Box 1 amount on the
previous screen.)
If
you answer Yes, the entire distribution is
nontaxable. But if you answer No, the portion you didn't
spend on medical expenses is taxable income which appears on Form 8889, line 16
and is transferred to line 21 of your 1040 form.