Why does TurboTax deduct HSA distributions when calculating medical expenses for Schedule A when some of those distributions might have been for a previous years expense?

[tangrnand4]

I understand that the way TurboTax works, it expects you to enter ALL expenses in Medical and Dental for Schedule A, then it will ask you for the amount of insurance reimbursements so it can subtract that, and then TurboTax will automatically subtract the HSA distributions. But what if my HSA distributions included expenses (say, $1000) that were paid for out of pocket in the previous year, but reimbursed this year? Hypothetically, if I have $12,000 in OOP medical expenses in 2017, and requested and received HSA distributions for $5000, then I should be able to itemize $7000 worth of expenses on Schedule A. But if my actual HSA distributions for the year, also included a $1000 reimbursement for an expense incurred last year, but refunded this year, then TurboTax will only put $6,000 of itemized medical expenses on Schedule A.

[BMcCalpin · Accepted solution]

As you have probably seen in other answers, you should make an entry on Schedule A that matches the HSA distributions, to offset the automatic transfer of the distributions against medical expenses on Schedule A.

For example, near the end of the Medical Expenses interview, you can enter a single line item called "expenses reimbursed by HSA" with the amount from the 1099-SA(s).

You are correct that some of the HSA distributions might have been for prior year expenses. And you may think it incorrect to show medical expenses on Schedule A for prior year expenses, just to offset the HSA distributions. 

But the fact is that this HSA entry on Schedule A is not going to be part of the return. All you are doing is adjusting the medical expenses entered to compensate for the HSA distributions so that the final Schedule A number will be correct.

Since TurboTax does not know how much of the distribution was for a prior year, it just subtracts all of them on Schedule A in the belief that you will compensate appropriately on Schedule A.

Go ahead and enter the compensating entry as an other medical expense in Schedule A with the total amount of the HSA distributions in 2017 (for all years) - your return will be correct.

If you are concerned about doing this, just keep notes of why you did what you did in the very unlikely chance that the IRS will ever write to ask about this.