However, the rules permit you to deduct from that income any expenses incurred prior to the decedent's death but paid over the year after the decedent's death.
In this case, the amount of the expenses cannot exceed the amount of the inheritance (which was the FMV on the date of death), because TurboTax is going to subtract the expenses from the inherited amount, and this cannot be less than zero.
So either reduce the amount of expenses to the FMV on the date of death or enter the correct FMV on the date of death (yes, it says FMV at the end of the year, but it should be the date of death).
However, the rules permit you to deduct from that income any expenses incurred prior to the decedent's death but paid over the year after the decedent's death.
In this case, the amount of the expenses cannot exceed the amount of the inheritance (which was the FMV on the date of death), because TurboTax is going to subtract the expenses from the inherited amount, and this cannot be less than zero.
So either reduce the amount of expenses to the FMV on the date of death or enter the correct FMV on the date of death (yes, it says FMV at the end of the year, but it should be the date of death).
No one died so I don't understand this, I doubled check the work to make that wasn't put in their anywhere. I just put in zero.
There is a question in the HSA interview that asks "Did [name] inherit this HSA?" You won't get this question about the qualified medical expenses and the FMV unless you say "yes" to the question. Note that according to the message you posted, this occurred on your spouse's HSA.
Also, there are two distribution codes in the 1099-SA that the distribution was an inheritance. The code is normally "1" (normal distribution). Perhaps they will trigger the same question about medical expenses.
Go back to the HSA interview and review your answers. If you cannot figure out what happened (or TurboTax refuses to forget something so still thinks you had an inheritance), then do the following:
The safest - although brute force - way to fix this is to do the following in this order:
1. make a copy of your W-2(s) (if you don't have the paper copies)
2. delete your W-2(s) (use the garbage can icon next to the W-2(s) on the Income screen
*** Desktop***
3. go to View (at the top), choose Forms, and select the desired form. Note the Delete Form button at the bottom of the screen.
*** Online ***
3. go to Tax Tools (on the left), and navigate to Tools->Delete a form
4. delete form(s) 1099-SA (if one), 8889-T, and 8889-S (if one)
5. go back and re-add your W-2(s), preferably adding them manually
6. go back and redo the entire HSA interview.