Took an HSA distribution for 2022 medical expenses. TurboTax assumes/calculates this distribution was for 2023 medical expenses. How do I fix this?

[zweiguy]

The Feb 2023 HSA distribution was for 2022 unreimbursed medical expenses. TurboTax is calculating that this distribution offsets my 2023 medical expenses. I'll be taking the MFJ standard deduction. Will this affect the numbers for my MN state return?

[Bsch4477]

Your HSA withdrawal is reported in the year of withdrawal and can be used for qualified medical expenses paid in previous years. 

[dmertz]

As you noted, TurboTax automatically subtracts the amount of HSA distributions used for qualified medical expenses from the medical expenses that you enter when you are itemizing medical expenses on Schedule A.  When under Deductions & Credits TurboTax asks you to enter your medical expenses, you must include those for which you obtained an HSA distribution even though they were incurred and paid out of pocket in an earlier year.  However, you said that you will be using the standard deduction on your 2023 tax return, so there is no need to enter medical expenses at all.

Just be aware that, with respect to an HSA, qualified medical expenses are only those incurred after the establishment of the HSA.  You are not permitted to reimburse yourself from the HSA for medical expenses incurred before you establish the HSA.

[zweiguy]

Yes, I understand that. What I'm questioning is why TurboTax using the HSA distribution to offset 2023 expenses on the medical expenses worksheet (Line 13b) thereby reducing my deduction. That's the part I'm not grasping. Why am I reducing my 2023 medical expense deduction for reimbursing 2022 medical expenses?

[edit] My total unreimbursed 2023 medical expenses exceeded 7.5% of our 2023 AGI. For example, $100K AGI, $10K unreimbursed medical expenses making $2500 worth of medical deductions. But my HSA reimbursement of $6K for 2022 is counted against our $10K spent in 2023. The result is that TurboTax calculates we only have $4K of unreimbursed medical expenses in 2023. Therefore no deduction. [/edit]

Perhaps I'm learning an unpleasant lesson. If I had taken an HSA distribution that exceeded my 2023 medical deductions it appears TurboTax would tell me I had screwed up. 

[zweiguy]

"When under Deductions & Credits TurboTax asks you to enter your medical expenses, you must include those for which you obtained an HSA distribution even though they were incurred and paid out of pocket in an earlier year."

The interview doesn't mention including previous years, only 2023. 

However, you said that you will be using the standard deduction on your 2023 tax return, so there is no need to enter medical expenses at all.

That was a close call, which required crunching the numbers. My question arises WRT the possible ill effects of having (IMO) an incorrect calculation on the Federal return on my MN State return.  I've deleted the medical expense worksheet and will answer "No" to the interview question that I did not exceed the (7.5% of our AGI) dollar threshold for medical expenses. 

No worries, I'll sort it out. Cheers.

[dmertz · Accepted solution]

"The interview doesn't mention including previous years, only 2023."

In the implementation of the Medical Expenses Worksheet, the TurboTax developers failed to anticipate obtaining an HSA distribution to reimburse yourself for qualified medical expenses incurred and paid out of pocket in a previous year.  They assumed, incorrectly, that HSA distributions applied to qualified medical expenses are only being applied to current-year medical expenses when they chose to automatically populate line 13b of the worksheet from the entries made in the HSA section of TurboTax.  This is a known issue with TurboTax that has been addressed in this forum quite a few times over the years.

On the page that instructs to "Tell us about any other medical expenses," just enter a line item for the amount of the HSA distribution that is reimbursement for qualified medical expenses paid out of pocket in a previous year.

[zweiguy · Accepted solution]

On the page that instructs to "Tell us about any other medical expenses," just enter a line item for the amount of the HSA distribution that is reimbursement for qualified medical expenses paid out of pocket in a previous year.

I sincerely appreciate this, a kludge solution to a software failure. Much obliged.

How to overcome a TurboTax "feature"

[rfisher71]

There is a problem with this solution for people in some states such as California which do not allow the HSA deduction. When one increases the 2023 medical expenses in TurboTax by the distribution amount for 2022 medical expenses, it will calculate the Federal Tax liability properly. However the California TurboTax software automatically adds the HSA distribution back for the medical expense California state calculation. Therefore your California medical expenses are overstated by the amount of the HSA distribution. So basically the choice is that one can understate their federal medical expenses or overstate their state medical expenses. THE SOLUTION WOULD BE FOR TURBOTAX TO ASK IN THE "INTERVIEW" SECTION THE AMOUNT (IF ANY) APPLIED TO PREVIOUS TAX YEAR MEDICAL EXPENSES.

[BillM223]

@rfisher71 

The IRS has left several gaps in how to handle HSA activities - this "what to do" when you distribute HSA dollars in one year when the dollars were contributed to the HSA in a different prior year, is just one example.

As @dmertz noted, this leads to the TurboTax developers making assumptions that don't fit the situation.

And when you add in the two states (California and New Jersey) that do not conform to federal law concerning HSAs, the complexity mounts. This is why these situations have been the matter of discussion, and I look forward to TurboTax handling this differently in the future (whatever that might be).