How do I show medical expenses on CA return that were incurred but won’t be reimbursed from HSA account until future year

[mfernkes]

I had $10,000 medical cost incurred in 2020 that I plan to reimburse myself in future years from my HSA account. I also had in addition $2,000 of cost reported on 1099-SA.  In total these cost exceeded 7.5% of my income and would result in my itemized deductions to exceed the standard deduction.   Will I be able to deduct on my California state taxes the $10,000 of expenses in 2020 and if so what is the process?  I'm under the assumption the $10,000 can not be claimed as medical expense for federal purpose  if my plan is to reimburse myself in later years.

[BillM223 · Accepted solution]

"I'm under the assumption the $10,000 can not be claimed as medical expense for federal purpose  if my plan is to reimburse myself in later years."

Yes, you are correct.

The IRS says in Pub 969:

"Recordkeeping. You must keep records sufficient to show that:

• The distributions were exclusively to pay or reimburse qualified medical expenses,

• The qualified medical expenses hadn’t been previously paid or reimbursed from another source, and

• The medical expenses hadn’t been taken as an itemized deduction in any year."

So if you deducted*** them on the federal return in 2020, you would be unable to take an HSA reimbursement for them in a future year.

***This means that you had Medical Expenses on Schedule A. This does not apply if you took the Standard Deduction (see below)***

"Will I be able to deduct on my California state taxes the $10,000 of expenses in 2020 and if so what is the process? "

Yes, you can claim at least part of the medical expenses (even one that will be reimbursed in the future) in California (because of the limitations).

However, I do not see an easy way to do this within TurboTax. As best I can tell, California populates its Medical & Dental Expenses Worksheet from the federal Medical & Dental Expenses that you entered...but if you do enter them, then you will be unable to take a reimbursement in the future.

The only workaround that I can think of (but it may not work for you), is for you to enter all the medical expenses on the federal return, then at the end of the Deductions & Credits interview (see this TurboTax Help page) choose the Standard Deduction over the Itemized Deductions. Note that you won't have to do this if TurboTax was using the Standard Deduction anyway, but if you were planning on using Schedule A, then you're out of luck.

If you are able to do the above, then the Medical Expenses should carry to California.

Make sense? You will just have to play with it to see if it works for you.