An HSA distribution—money spent from your HSA account—is nontaxable as long as it's used to pay for qualified medical expenses.
HSA distributions used for anything other than qualified medical expenses are not only taxable, they're subject to an additional 20% penalty if you're not disabled or are under the age of 65.
After you enter your 1099-SA, we'll ask Did you spend all the money you took out on medical expenses? If you answer Yes, the entire distribution in box 1 of your 1099-SA is nontaxable.
However, if you answer No, the portion that wasn't used for qualified medical expenses becomes taxable income. This income appears on Form 8889, line 16 and Schedule 1, line 8. The 20% additional penalty, if applicable, will show up on line 17b of your 8889 and Schedule 2, line 8.