In 2023 I withdrew money from my HSA, it should be tax free, it is meant to cover 2020 medical expenses. Why is my Federal Tax Due increasing when I enter the amount?

[benwillis]

I am itemizing medical expenses for 2023, but it appears TurboTax is treating my HSA withdrawal to 2023 medical expenses, thus my medical deduction appears to be reduced by my HSA withdrawal. The problem is, the withdrawal is for 2020 expenses, but TurboTax behaves as if it were applied to 2023 expenses.

[DawnC]

Because when you enter the amount from a 1099-SA, it immediately is taxable.  However, you will get follow-up questions - one of which will be Did you use the funds to pay for qualified medical expenses?.    Once you answer those questions, the tax will be removed.    Don't enter any medical expenses, that were or will be paid with the HSA, in the Medical Expenses section of TurboTax.   

You can’t deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.  And you can't receive a tax-free distribution for any expense that you took as an itemized deduction in a previous year.   Did you itemize in 2020, and if so, did you include the expenses you received reimbursement for?   

The taxpayer can receive tax-free distributions from an HSA to pay or be reimbursed for qualified medical expenses incurred after the taxpayer establishes the HSA.

Qualified medical expenses include the medical expenses of the taxpayer, their spouse, or a dependent at the time the expense was incurred.  

See Publication 502, Medical and Dental Expenses, for more information.    And Publication 969.

Taxpayers must keep records to show that HSA distributions were used to pay or reimburse qualified medical expenses, and the medical expense had not been taken as an itemized deduction in any year.   For record keeping requirements on HSA distributions, see Publication 969, Distributions from an HSA.   Taxpayers who have taken HSA distributions will receive Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA, from their HSA trustee and must provide it before the return can be completed.

[dmertz]

When preparing Schedule A, 2023 TurboTax automatically subtracts from the itemized medical expenses the amount that you report as medical expenses paid with the HSA under the assumption that the medical expenses paid from the HSA were ones incurred in 2023.  Because the HSA distribution was instead applied to prior-year medical expenses for which you took no deduction, in 2023 TurboTax you must enter as 2023 medical expenses the amount that was paid from the HSA.  Enter this as other medical expenses with a description such as "Prior-year medical expenses paid with an HSA distribution."