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If HSA dollars were all spent on medical expenses, how/why

does the distribution count as...
If HSA dollars were all spent on medical expenses, how/why does the distribution count as taxable income?
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Answered in 4 minutes by:
9/27/2013
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,890
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
If the distributed money was used for reasons other than qualified expenses or the taxpayer was reimbursed through insurance for expenses they paid for with HSA money, then the taxpayer owes tax and a penalty (if they are under 65) on the amount.
Distributions from an HSA used exclusively to pay for the qualified medical expenses of you or your spouse or eligible dependents are generally excludable from gross income. The amount of any distribution not used exclusively for such qualified medical expenses is includable in your gross income.

Robin D. :

The amount of a mistaken distribution is not included in the gross income nor is it subject to the 20% penalty or excise tax on excess contributions if: 1) the taxpayer received the distribution as a result of a mistake of fact due to reasonable cause and 2) the taxpayer repays to their HSA the amount of the mistaken distribution no later than April 15 following the first year they knew or should have known of the mistake.

Customer:

So we receive a statement from the HSA bank, with the dollar amount we withdrew listed as the distribution. I just talked to the bank, and they say they report the total amount withdrawn, they don't know if it was used for medical or not. Ours was used for all medical, but since the 1099SA to the IRS lists it as a distribution, then it shows up as income on our taxes

Robin D. :

You would report the total but then you only report the true taxable amount. You should receive a Form 1099-SA that shows the total amount of your annual distributions (i.e. money you used) reported in box 1. Provided you only use the funds to pay qualified medical expenses, box 3 should show the distribution code No. 1, which indicates normal tax-free distributions.

Customer:

Yes, it does. But how do I relate that to form 8889? What happened is that the I didn't list the HSA distribution in 2011 (because I thought that was only for non-medical expenses) and now I've got a letter from the IRS saying we owe, because that $5190 should have been income.

Robin D. :

So sorry

Robin D. :

Another expert was able to lock while we were conversing

Robin D. :

Then you need to complete the 8889

Robin D. :

You would send that to the IRS to show that you used the amounts for the medical.

Robin D. :

The IRS sent you the letter because all they know is that they received the 1099SA but you did not advise on how you spent the funds

Customer:

We completed the 8889, but in Part II, HSA Distribution it says that amount needs to be carried to the 1040. I don't see where I get to tell them it is all medical expenses.

Robin D. :

Part II line 16 I think should be $0 let me pull up an actual 8889

Robin D. :

one sec please...........

Robin D. :

Ok, line 14a should show the total, and line 16 would be 0

Robin D. :

As I advised, make sure you have all your medical receipts with your copies. There is no need to send copies of those with the 8889

Customer:

Yes, I do have all the medical reciepts. So the tax form says to subtract line 15 from 14c (14c is $5192) and 15 is unreimbursed medical, which we don't have any unreimbursed. The way I'm reading that, line 16 would be the $5192, but the way you're explaining it makes sense to me.

Robin D. :

Good because if you do it anyother way you are saying that you received x amount but did not use it for medical. The Line 16 would be carried to the 1040

Robin D. :

14 is confirming what the 1099SA reported

Robin D. :

Line 16 is showing that it is not taxable because it was used properly

Customer:

Ok. I was misinterpreting the line 15 /16 calculation. That makes sense. I need to mail a statement to the IRS explaining what I did wrong, to avoid the extra $2000 they say we owe. I knew we did not owe because of how the HSA works, but couldn't understand what I did wrong.

Robin D. :

I am very glad that our CHAt was helpful and so sorry for that little glitch with the system

Customer:

no problem, thanks much for your help

Robin D. :

You are most welcome.
Your positive rating is always thanks enough.

Robin D. :

I really enjoyed working with you – please feel free to request me again when you come back to ask another question.
You will find the request feature when you come back under your MY QUESTIONS section.

Customer:

ok thanks!

Robin D. :

Best wishes

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,890
Experience: 15years with H & R Block. Divisional leader, Instructor
Verified
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