Married Filing Separate/HSA distributions

[wwwise3]

Due to large amount of medical bills incurred for my wife and we chose to file separately this year for the medical tax deduction.  I have an HSA family policy with my employer that I used distributions for some covered medical expenses for my wife and I.  As we are filing separate the question I have is who reports the 1099-SA amount? Do we each report how much of the HSA distribution we used on our own tax return or do I report the whole amount and we both report the full amount of medical expenses (out of pocket/non HSA distributions plus HSA distributions) on our tax return.  My medical bill portion is significantly less than the HSA distributions on the 1099-SA.   My wife's portion is the majority.  If we both report the full amount of medical expenses and only I report the full HSA distribution according1099-SA, will the IRS think that some of the HSA distributions were not used for medical expenses even though the remaining amount were used for my wife's medical bills.  Do they take into account her medical bill expenses when they look at the whole 1099 HSA distribution amount?

[macuser_22]

You do realize that you must itemize if your spouse itemizes to claim the medical deductions even if you have nothing to itemize.  You are not allowed to take the standard deduction.

That might result in a higher overall tax tax  of you filed joint.

I believe that only yiu can only use your HSA if it is  an employer plan on your W-2.   If it you HSA then you can claim the qualified medical expenses for you and your spouse on your tax return. 

If you file MFS (Married Filing Separately) keep in mind that there are several limitations to MFS.  Married filing Jointly is usually the better way to file.
 
A few of those limitations are: (see IRS Pub 17 for the full list

https://www.irs.gov/pub/irs-pdf/p17.pdf page 21

1. Your tax rate generally is higher than on a joint return.
2. Your exemption amount for figuring the alternative minimum tax is half that allowed on a joint return.
3. You cannot take the credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer's dependent care assistance you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. For more information about these expenses, the credit, and the exclusion, see chapter 32.
4. You cannot take the earned income credit.
5. You cannot take the exclusion or credit for adoption expenses in most cases.
6. You cannot take the education credits (the American opportunity credit and lifetime learning credit) or the deduction for student loan interest.
7. You cannot exclude any interest income from qualified U.S. savings bonds you used for higher education expenses.
8. If you lived with your spouse at any time during the tax year:
a. You cannot claim the credit for the elderly or the disabled, and
b. You must include in income a greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received.
9. The following credits and deductions are reduced at income levels half those for a joint return:
a. The child tax credit,
b. The retirement savings contributions credit,
10. Your capital loss deduction limit is $1,500 (instead of $3,000 on a joint return).
11. If your spouse itemizes deductions, you cannot claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.

- If you live in a community property state you must allocate community income between both spouses..
-
- Community property states.   If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin and file separately, your income may be considered separate income or community income for income tax purposes. See Publication 555. http://www.irs.gov/publications/p555/index.html

 
See this TurboTax article for help with this.
https://ttlc.intuit.com/questions/1894449-married-filing-jointly-vs-married-filing-separately

https://ttlc.intuit.com/questions/1901162-married-filing-separately-in-community-property-states

{edited to correct error]

[Opus 17 · Accepted solution]

The HSA is only in one persons name, there is no such thing as a joint account. The person who owns the account must report all of the income from the 1099, it can’t be split.  The person who owns an HSA may use it to pay qualified medical expenses for the themself, their spouse, or their dependents, and that is not changed whether you file jointly or separately.

However, you can’t list any medical expenses on your spouse’s tax return as tax deductions if they were paid from your HSA. Further, the fact that you paid your spouse’s expenses from your HSA may screw up the medical expense deduction  on your tax return, and you will need to enter a fake offsetting expense.  

For example, suppose you withdrew $5000 from an HSA and used $4000 to pay your spouse‘s expenses and $1000 to pay your own expenses.  If you then paid another $6000 of expenses for yourself, you would enter $7000 of medical expenses on your tax return. TurboTax will automatically subtract the entire $5000 HSA withdrawal and only give you a net $2000 medical expense deduction, instead of $6000.  You would need to enter an additional $4000 of dummy expenses for the TurboTax calculation to come out correctly. This calculation does not get sent to the IRS, they only get the final figure of the expenses that you claim as a deduction.  This situation is required because of the way TurboTax operates.

If you filed a joint return, you would simply enter all your medical expenses including the expenses that were reimbursed from the HSA, and let TurboTax subtract the HSA amount.

I want to doubly emphasize that when you file separate returns, both spouses must itemize their deductions. If you stack all the itemized deductions on one spouse and the other spouse takes the standard deduction, the IRS come will come back at you with a bill for the tax due plus penalties and interest.  It’s still can sometimes be beneficial to file separately, but you need to make doubly sure you are doing everything correct.

[wwwise3]

Thank you for you reply.  We know we made a mistake to use HSA for the expenses.  This year we are not doing that again since we expect another large sum of medical expenses.  We are both itemizing deductions also so no worries there. We tried to file jointly but we owed significantly more in taxes that way than separately so far.  Just wanted to make sure we were accounting for HSA and medical deductions correctly.

[Opus 17]

It’s not a mistake to use the HSA, it’s just that you have to account for the assumptions that TurboTax makes.

Remember that your HSA is completely tax-deductible when you make the contributions, and if you make the contributions by via payroll deduction, it is also exempt from the additional 7.65% Social Security and Medicare tax.  Your itemized deduction for medical expenses only saves you the federal income tax, may save you state income tax depending on your state, but does not save you the Social Security and Medicare tax. And, the itemized medical expense deduction is subject to the 7.5% floor so it will never be as beneficial to you as the HSA.

if you did not fully maximize contributions to your HSA now, which is $7100 for 2020 if you have a family insurance plan, you can make a deposit now as a 2020 contribution as long as it is made before April 15. You can then immediately withdraw the money to reimburse yourself for your prior unreimbursed medical expenses. In effect, you “wash“ some money through the HSA to get a immediate tax deduction. You should also maximize your HSA contributions for 2021.   Just be aware that in order to make a contribution for 2020, you may have to make a special selection on the website or use a special form when mailing a check.