HSA Distributions

[John1955]

I am retired.  In 2020 I began filing claims from my HSA for eligible expenses (prescription copays, doctor copays).  I am claiming these copays as medical deductions.  If I have been reimbursed, do I simply not claim them, claim them anyway, or show the expenses and report these distributions even though my HSA does not report these distributions to the IRS?  And how would I report these distributions in my tax return?  I don't meet the threshold for Medical Expenses for the Federal Government but it does affect my state return.

[BillM223]

You can take an HSA distribution for any qualified medical expense that was incurred after the HSA was created, even if you do this years later.

Once you repay yourself for the copay or whatever with HSA funds, you cannot take these copays as a medical deduction (you said that but I am not sure what you meant by that). However, keep reading...

These distributions are indeed reported to the IRS, although the IRS won't know exactly what they were for unless they audit you. It is up to you to keep adequate records of why you took a distribution to reimburse yourself.

NOTE: TurboTax expects that you enter all medical expenses in the Medical and Dental section, even those reimbursed by insurance and your HSA. This is why it asks about your insurance reimbursement, so it can subtract it from your medical expenses.

However, TurboTax automatically subtracts your HSA distributions from your medical and dental expenses, which means that if you don't enter the HSA distributions as medical expenses, the medical total for Schedule A will be wrong.

So this is very counter-intuitive, but if you had HSA distributions AND you are trying to take the medical deduction on Schedule A, then you need to create a dummy entry under Miscellaneous in Medical and Dental expenses, saying, "HSA distribution adjustment" and the total amount of the 1099-SA distributions. 

In this way, your other medical and dental expenses will be correct.

If you have no intention of trying to take the medical deduction on Schedule A, then you can ignore this, because the HSA action will not affect your return.

Note that you will not actually be deducting these copays that were reimbursed by your HSA, just fudging the medical and dental number so that the Schedule A amount will be correct.

If this doesn't make sense, just come back and tell me.

[Opus 17]

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@John1955 wrote:

I am retired.  In 2020 I began filing claims from my HSA for eligible expenses (prescription copays, doctor copays).  I am claiming these copays as medical deductions.  If I have been reimbursed, do I simply not claim them, claim them anyway, or show the expenses and report these distributions even though my HSA does not report these distributions to the IRS?  And how would I report these distributions in my tax return?  I don't meet the threshold for Medical Expenses for the Federal Government but it does affect my state return.

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What do you mean by, "If I have been reimbursed,"?

If you have been reimbursed tax-free for a medical expense, and you then also claim it for reimbursement from your HSA, then the reimbursement is taxable income, because you can't pay for an expense with tax-free money and also get a tax-free reimbursement.  This would be entered as a "taxable recovery" in the "uncommon income" section.  It would be best not to take HSA reimbursements for expenses that were already reimbursed by some other method.

The issue that Bill describes when trying to deduct medical expenses in Turbotax is because Turbotax is written to assume that you can't determine your own deductible medical expenses.  It asks for total expenses and then asks for reimbursements, so if you reimburse yourself for an old expense, it will reduce your current deduction unless you take the steps Bill outlined.  However as I said, it would be best not to reimburse yourself for anything that was already reimbursed.  Stick to your out of pocket non-reimbursed expenses.