HSA Reimbursement after itemizing

[dmitri1]

I had $35000 of medical expenses in 2019. I was able to deduct $14000(amount excess of 7.5% of AGI) in itemized deductions. Can I have my HSA reimburse the rest? i.e. $35000 - $14000 = $21000

[Opus 17 · Accepted solution]

Yes, but you won’t get the benefit you think you will.

First of all, you can’t reimburse any expenses from an HSA unless the expense was incurred after you established the HSA.  It is allowed for you to deposit money now (and take a tax deduction) and then immediately withdraw it to reimburse yourself for a past expense, as long as the account was actually established before the expense was incurred.  Assuming that you had the HSA in 2019 and had funds available, it would have been much simpler to have reimbursed the expenses directly.

If you reimburse the expenses now, you will have a taxable event known as a recovery, or a reimbursement of a previous deduction. You have to refigure your expense deduction from 2019 and any extent to which that expense deduction was reduced, it becomes taxable if you reimburse it from your HSA in 2020 or in 2021.

You use the “tax benefit rule” to figure how much your taxable recovery is.  For example, you said you had $35,000 in expenses. If you now reimburse yourself for $5000 of expenses, that means that you were only entitled to a medical expense deduction of $30,000 in 2019, or in other words a $9000 deduction after the AGI limit. Since you deducted $14,000, that means that the $5000 reimbursement is now a taxable recovery and must be reported as taxable “other income“.  If you reimburse yourself any amount more than $14,000, your taxable recovery maxes out at $14,000 since that is the deduction you took.  

On the other hand, if we suppose that your total deductions were $25,000 and you itemized rather than using the standard deduction for a married couple of $24,000, then reducing your medical expenses by even $1000 would bring you to the point where you would have used the standard deduction instead. So the maximum tax benefit of your medical expenses was actually $1000 and only the first $1000 of HSA reimbursement would be a taxable recovery. This is the application of the tax benefit rule.

What you want to do is to use the $21,000 both to satisfy the AGI limit and to qualify for tax-free reimbursement and that is double dipping and not allowed.

[dmitri1]

Thanks for your answer. Yes, my HSA was established long back, it just didn't have enough money to use for my medical expenses.

I was confused by the double-dipping since that $21,000 portion was not deducted/reimbursed.

[NCperson]

yes, the $21,000 was deducted..... you used it to achieve the 7.5% minimum for the deduction of the part above $21,000.

You get to use it either as part of the calculation of Schedule A or as a distribution of the HSA.  If you use it in both places, it's 'double dipping'.  

[dmitri1]

Thanks again for the responses. I have one follow-up question.

Say if I reimburse a portion of my medical expenses and it gets added to my taxable recovery. Do I need to go back and amend my 2019 return or it gets added to my income of the year I do the reimbursement?

[Opus 17]

That's what taxable recovery means, you report the reimbursed tax deduction as income in the year of reimbursement instead of amending.