Since Alabama will not allow a deduction for HSA accounts, until 2018, why can't I list my medical expenses on my 2017 Alabama schedule A?

[bvwelch]

The medical expenses were covered by the HSA credit on my Federal return, but Alabama does not honor HSA until 2018, so I should be able to list my medical expenses on my 2017 Alabama schedule A, but Turbotax refuses to allow me to edit that field.

[BMcCalpin]

The general design tendency in TurboTax is to enter things on the federal return and to let them flow to the states. This is true of medical expenses that would go on Schedule A of the federal return.

Note that TurboTax automatically carries HSA distributions to Schedule A as a type of reimbursement. Therefore, to keep things equal, you need to make a one-line entry at the end of the medical expenses section on Schedule A (Federal->Deductions & Credits->Medical->Medical Expenses) that's says "Medical expense reimbursed by the HSA" along with the amount of the HSA distributions.

Medical expenses are sometimes deductible in Alabama, even if you take the Standard Deduction on the federal return.

You should enter medical expenses on the federal return (Federal->Deductions & Credits->Medical) even if you won't get a deduction on the federal return, because they will carry down to Alabama and, if deductible, will reduce your Alabama tax due or increase your Alabama refund. This is why we are doing the HSA distribution and expenses this way.

Also, if you enter the medical expenses are entered this way (on the federal return), then the correct limits in Alabama are applied. If you entered the medical expenses on the state return as a deduction on the "Let's Check for any Alabama Deductions" screen (at the bottom under the subheading "Other Deductions"), you would be responsible for calculating the correct amount that can be deducted.

[bvwelch]

Thank you for your helpful reply. However, your suggestion did not work. I entered all of my expenses in Federal, as per your instructions, including the entry about med expense reimbursed, but the end result, was that turbotax threw away my entries on the fed schedule A, and moving on to the Alabama, turbotax still refuses to allow me to enter any med expenses.

[BMcCalpin]

Please note that even though the Alabama medical deduction is more generous than the federal, it is still subject to a 4% floor. That is, when TurboTax brings the federal medical expenses down to Alabama (it does, I just reconfirmed it), the medical expenses must be in excess of 4% of the Alabama adjusted gross income to be deductible on the Alabama return (it's 7.5% on the federal return).

Therefore, depending on what medical expenses you entered on Schedule A of the federal return and your AGI, you still might not have a medical deduction...but this is the correct way to make this work.

"turbotax threw away my entries on the fed schedule A" - if your medical expenses do not exceed 7.5% of your federal adjusted gross income, they are not deductible on Schedule A - IRS rules, not TurboTax's.

"turbotax still refuses to allow me to enter any med expenses." I did not say that you could enter medical expenses on the Alabama return - you have to enter them on the federal return and see if - when they carry down to the state - any of the amount Is deductible.

[bvwelch]

Thank you for your help, but it seems that the issue, since Alabama 2017 does not recognize the HSA as a tax break, then the amount that Alabama 'sees' should be the full amount of my health expense (including the amount I paid via the HSA).  But what is happening now, is that TurboTax sends down from Federal to State, only the amount above (not paid by) the HSA amount. Worst case I can use other means for filing my Alabama return.

[BMcCalpin]

You added the extra HSA entry in Schedule A ("Medical expense reimbursed by the HSA")? And you are saying that the new total did not carry down to Alabama (even after factoring for the 4% floor)?

Hmmmn, this is not the way my test worked. But note that I am on Windows, not Mac.

But before giving up, I would try deleting Alabama and re-adding it, to force the Schedule A info to be carried fresh to the Alabama return.

[bvwelch]

Yes, I added the 'reimbursed by HSA entry. As a hypothetical example, say you have 6000 med expenses, of which 5000 is covered by HSA. We should see 6000 carried to State, but instead only 1000 is carried to Alabama by TurboTax.

[BMcCalpin]

Oh, in your example, only $1,000 should be carried to the state, because only $1,000 was available to Schedule A. Both Schedule A and Alabama will report only unreimbursed medical expenses. Are your medical expenses (minus insurance reimbursement and HSA distributions) greater than 4% of your Alabama adjusted gross income? If not, then there shouldn't be anything on your Alabama return.

[bvwelch]

hmmm, Alabama does not see the HSA as anything other than a (after taxes) checking account, so my view is that all of the hypothetical 6000 should be shown on the Alabama schedule A. I understand about the 4%, but it should be against the 6000, not 1000.

[BMcCalpin]

I apologize - I am in the other 47 state mode so much (where HSAs are deductible) that this slipped my mind, even though you mentioned it up front.

You are correct that the expenses that were paid with HSA distributions are not being carried down to Alabama even though these expenses were obviously paid with after-tax money (from Alabama's point of view).

OK. you know what the total expenses on Schedule A are, right? subtract the insurance reimbursement (if any, and this is the amount that should be carried to Alabama.

But you can deduct the amount only to the extent that it exceeds 4% of your Alabama AGI. So you can figure that number, too, right?

OK, now you have what the medical & dental deduction in Alabama should be...and you also know what deduction you actually have.

You will place the difference between it is and what it should be on the screen "Let's Check for any Alabama Deductions" under the subheading "Other Deductions - Other itemized deductions not subject to a 2% floor". Click on Start and you will see a place to enter a description and a dollar amount. Remember that you have to allow for the 4% floor - that is, if the expenses carrying from Sch A are less than the 4% floor, then you have to add the amount of the HSA expenses that would be over the 4% floor if all were done correctly.

I can't tell you what description to use - just make it something that you will remember if anyone ever writes and asks what this is - you will just need to explain that you are using software that unexpectedly disallowed medical expenses that were covered by an HSA as if the HSA were non-taxable, so this adjustment made the overall deduction correct again.

It won't be on the right line on the Alabama return, but the bottom line will be the same.

Sorry this has taken so long...

[bvwelch]

Thank you for your help, I learned a lot about TurboTax.