Adding my HSA distributions for tax year 2023 increased "Federal Tax Due" about $250 (box checked indicating HSA funds used for qualified expenses). This make sense?

[bob-reichert-liv]

Thank you for your patience and coaching.  I appreciate it.

One interesting thing I learned.  I think I would have been better not using HSA funds in 2023.

In the example, if I would have paid all $8700 out of pocket (not using any HSA funds), the total on the "Medical Expenses Worksheet" Line 14 would have been larger (and Schedule A Line 1 as it is the same value).  This would provide a larger deduction lowering my tax bill.  If this is correct, it makes sense why when I reduce the HSA amount, my "Federal Tax Due" is lower (the larger deduction lowers my tax bill).

Guess I could have used a better crystal ball to predict my 2023 taxes.  😉

[clschaaf]

I have a similar problem for 2024.

The HSA distribution was to close my HSA account and I have documented more than enough expenses from previous years to cover the amount.

The problem is that Turbotax automatically assumes that the distribution was for the current tax year and makes no provision for it being for expenses incurred in previous years.

When I follow the advice above, it sets my Federal taxes correctly.  BUT it changes my state taxes (California) and I cannot fix it.

[bob-reichert-liv]

Hello,

I don't have State income taxes, so I didn't have to deal with that.  If you don't see another answer, you might have to start another question (post).  It would be nice if TurboTax would add features & comments to help guide with this.  

My take-away (learning) was to be careful how I use HSA funds.

Good luck.  

[BillM223]

clschaaf

Yes, TurboTax automatically assumes that all medical expenses were paid in the current year. The IRS introduced a conundrum when they said that you could repay yourself for older medical expenses, so long as they were incurred after the start of the HSA.

As you see, TurboTax automatically adds back the entire 1099-SA amount that is used for medical expenses.

But since CA surely allows only current year expenses. So do this:

On the screen that says "Here's the Income that California handles differently", go to the bottom and click on "Other Adjustments to Income".

Here you can do the necessary adjustments. Remove the multi-year distribution and subtract out the current year medical expenses.

The amount of the 1099-SA that was actually for medical expenses will appear on line 4 in Part II as an addition. If you want to remove only the current year expenses, then take the difference of the current year expenses in that 1099-SA and the prior year expenses, and enter them as a subtraction, so that the prior year medical expenses will not appear as a current year expense in CA,

I hope that makes sense.

@clschaaf

[clschaaf]

Thank you Bill!

I followed the steps you suggested on March 15, 2024 11:11 AM.

("enter a miscellaneous medical expenses in your Schedule A, where the description is
"HSA adjustment", and the amount is equal to the total of the 1099-SA amounts for qualified medical expenses.")

This seemed to correct my Federal tax due.  At the same time, it increased my CA refund.  I believe that's proper since California doesn't tax the HSA distribution.  I seem to remember that CA also doesn't give a reduction in income for HSA contributions.

For context - I contributed to the HSA for 10+ years, never taking a distribution.  In early 2024, I closed the account, making sure that I documented enough previous year medical expenses to exceed the account balance.  In case I get audited, I have the documentation.

The 2024 medical expenses I entered were all out of pocket and not reimbursed by the distribution.

Do I still need to perform the CA adjustment to income and add the HSA amount as an addition?  Doing so will reduce my CA refund.

(I thought about editing the 1099-SA and changing the amount to zero, but I figured the IRS wouldn't like that and trigger an audit.  I also attempted to override line 13b to zero on the Schedule A worksheet, but TurboTax called it an error).  This does appear to be a gap in functionality.

[BillM223]

"I believe that's proper since California doesn't tax the HSA distribution." - True

"I seem to remember that CA also doesn't give a reduction in income for HSA contributions." - Also true

"making sure that I documented enough previous year medical expenses to exceed the account balance." - you mean expenses for 2023?

"Do I still need to perform the CA adjustment to income and add the HSA amount as an addition? " When you look closely, you will see a number of items concerning HSAs that TurboTax automatically adjusts on the CA return. By and large, you should leave these alone. 

But you are referring specifically to the 1099-SA that was the distribution to close the HSA? Did you tell TurboTax that the distribution was for medical expenses or not?

Well. the amount that was for medical expenses ends up nowhere on the federal return on but is on Line 4 on Part II on Schedule CA. The amount that was not for medical expenses ends up on line 8f Schedule 1 (1040). but on Schedule CA in Part I schedule B, line 8f.

I think that whatever you did with the distribution, you should leave those alone.

"I also attempted to override line 13b to zero on the Schedule A worksheet, but TurboTax called it an error).  This does appear to be a gap in functionality." - Why?

[clschaaf]

"previous year medical expenses" was a typo.  It should have been "previous years".

Since I never took any distribution when I was contributing, I had multiple years worth of medical expenses that I documented that more than offset my final distribution.  None of those expenses were from 2024.

Yes, I told TurboTax that the entire distribution was for medical expenses.

The fact that TurboTax automatically populates line 13b is the gap.  It should not automatically assume the distribution applies to current year medical expenses.  There should be an additional question regarding whether it's for current and/or previous years.

The workaround that you suggested worked, but without reading your answers, I wouldn't have figured it out.  I would have overpaid Federal and received a smallerr CA refund.

Thanks for your time and expertise.