After I entered my own contribution for HSA, my estimated Federal refund dropped by nearly $300. I thought making contribution to HSA would reduce the taxable income.

[BMcCalpin]

The IRS considers, by default, HSA contributions to be taxable, UNTIL you declare that you have proper HDHP coverage. You do that in the HSA interview.

So, from the time that you enter your code W amount in box 12 of your W-2 until you complete the HSA interview, the code W amount is showing as taxable.

The same is true (although for a much shorter period of time) if you made direct contributions to your HSA. When you enter the direct amount (misleadingly called a "personal" contribution in the HSA interview) on one screen, you are not asked until two or so screens later if you had HDHP coverage. Only after that will the direct HSA contribution be considered to be deductible.

TurboTax has to sometimes do things in the background that are out of sync with the screen you are on - that is why we encourage taxpayers to not watch the Refund Meter too closely.