Determining if HSA distributions is still tax-free for dependent that recently went nondependent

[TT_1]

From January 2017 to July 2017, my adult sister was unemployed and uninsured. Her status at the time was dependent since she was an immediate adult relative who lives with my parents in a state where Medicaid was not expanded, and my parents provided more than half of the support. From August 2017 to November 2017, my sister worked as a seasonal employee and earned a gross income of $4,235, converting her into a nondependent. Her employer did not offer her insurance. HSA distributions to pay my adult sister’s qualified medical expenses took place when she was a dependent and she did not exceed the $4,050 threshold until November.

All the HSA distribution transactions appear in my mother’s name and is also the owner of the account. Although my adult sister exceeded the gross income test limit by $185, she still lives with my parents, is uninsured, is once again unemployed, and receives more than half of the support from my parents. Are the HSA distributions still tax-free despite these circumstances?

[dmertz · Accepted solution]

These are still tax free.  Qualified medical expenses include those of an individual who could have been claimed as a dependent on your tax return except that the individual had gross income of more the $4,050 (in 2017).  Expenses of this individual continue to be qualified medical expenses as long as they meet the other requirements for being your dependent.

See Qualified Medical Expenses in IRS Pub 969:  https://www.irs.gov/publications/p969#en_US_2016_publink1000204083