Distributions from an HSA

[Z3Dreamer]

Lets say that I put $6,000 in my HSA. Lets say that on my tax return, I itemized and had $10,000 in medical. Due to my AGI, I could only deduct $4,000. Beginning of the next year, I want to pull some out of my HSA. Based on this one year, what can I pull out without penalty or tax?

The IRS says I can pull out medical expenses as long as "the medical expenses have not been taken as an itemized deduction". DW says this means we can take none out as we used all $10,000 to get to the $4,000 deduction. I say that we only deducted $4,000 and therefore can pull out up to $6,000.

We are both retired CPAs but no longer have access to CCH, PH or RIA. Anyone have a citation?

The HSA administrator's useless phone support quickly said $6,000, but I don't think they understood the question.

 

[bingybear]

Sorry, not a CPA here, but as we all know, DW is always correct.

I've not been itemizing since RE, but have been collecting receipts for medical expenses. I should be able to pull HSA $ later in life and use the old receipts.

Back to your case, you used some of those medical expenses to qualify for the medical deduction (exceed the 7.5% or 10%). These expenses were used to figure your deduction.
quote from here

If you pay any medical expenses from a Health Savings Account (HSA), Medical Savings Account (MSA), or Flexible Spending Account (FSA), you can’t include these payments when figuring your deduction.

no double dipping.

 

[gauss]

+1 no double dipping.

By the logic presented, you could take HSA distributions for all the medical expenses that you added up to surpass your standard deduction (assuming no other Schedule A deductions were present).

I think that this clearly would not fly.

Here is the governing text from the Code 26 USC Sec 223(f)(6)

(6) Coordination with medical expense deduction
For purposes of determining the amount of the deduction under section 213, any payment or distribution out of a health savings account for qualified medical expenses shall not be treated as an expense paid for medical care

 

[RunningBum]

I don't think you two have answered the pertinent question though.

In 2017, Z3Dreamer can't pull out $6000 out of the HSA and also include that $6000 on line 1 of schedule A, medical expenses. Out of the $10,000 in expenses, if he took $6000 out of the HSA he could only put $4000 on line 1, and that would result in no deduction on line 4 because of his AGI. That's what you two are answering.

But I think what he wants to do is to put $10,000 on line 1, which works out to $4000 on line 4 for them for 2017 taxes. Then in 2018, he wants to pull $6000 out of the account. Only $4000 was actually used as a tax deduction in a previous year, so I think he's allowed to take $6000 out of the HSA since that amount was never actually deducted. It was used in the calculation, but not deducted.

I could be wrong, but the difference is that the HSA withdrawal is done in a later year, and what you've both quoted is the case of trying to withdraw from the HSA and take the deduction in the same year.

 

[RunningBum]

btw I am watching this because a few years ago I took a deduction on part of my medical expenses. On my spreadsheet I marked the amount of the deduction as being "used" against my expenses, but not the whole amount of medical expenses that year.

I suspect in the long run I'll eventually have more allowable expenses to draw against even without that other amount, but it'd be nice to know for sure in case I want to pull more from my HSA. I originally thought I'd keep money in the HSA as long as possible, but I might want to pull it to keep other income down to qualify for ACA subsidies.

 

[MichaelB]

When I discussed this with my tax preparer, he said no to what Z3 and RB are proposing, and explained it just a Bingy and gauss did. Itemized medical expenses are not just the ones that exceed the income threashold, they are the gross expenses entered to calculate the deduction. Once used as a deduction, they are never eligible for tax feee HSA reimbursement, in that tax year or any other.

 

[RunningBum]

When I discussed this with my tax preparer, he said no to what Z3 and RB are proposing, and explained it just a Bingy and gauss did. Itemized medical expenses are not just the ones that exceed the income threashold, they are the gross expenses entered to calculate the deduction. Once used as a deduction, they are never eligible for tax feee HSA reimbursement, in that tax year or any other.

OK, I did a little more searching and that seemed to be the consensus, though in places no more official than forums like this. I'll update my HSA spreadsheet with the full Sched A line 1 amount from that year, with a note to check again for myself if line 4 could be used instead in case I want to withdraw more.

 

[bingybear]

I don't think you two have answered the pertinent question though.

In 2017, Z3Dreamer can't pull out $6000 out of the HSA and also include that $6000 on line 1 of schedule A, medical expenses. Out of the $10,000 in expenses, if he took $6000 out of the HSA he could only put $4000 on line 1, and that would result in no deduction on line 4 because of his AGI. That's what you two are answering.

But I think what he wants to do is to put $10,000 on line 1, which works out to $4000 on line 4 for them for 2017 taxes. Then in 2018, he wants to pull $6000 out of the account. Only $4000 was actually used as a tax deduction in a previous year, so I think he's allowed to take $6000 out of the HSA since that amount was never actually deducted. It was used in the calculation, but not deducted.

I could be wrong, but the difference is that the HSA withdrawal is done in a later year, and what you've both quoted is the case of trying to withdraw from the HSA and take the deduction in the same year.

If you pay any medical expenses from a Health Savings Account (HSA), Medical Savings Account (MSA), or Flexible Spending Account (FSA), you can’t include these payments when figuring your deduction.

Using your dates/example provided, the 10k on the 2017 taxes was used on line 1 was used to figure the deduction of 4k. So if one thinks they can recapture that $6k.. you really can't. If in 2018 one wants to pull out $6 from the HSA based on the $6k from 2017 sch A that was used to meet the 10% of income, then you need to amend the 2017 sch A line 1 to $4k and follow the changes from there.

The same expense can't be used multiple times.

Assuming the HSA was started before any of these medical expenses, he could reimburse himself with the $6k this year. Next year he could contribute to the HSA and reimburse the other $4k.

So as I see it the OP can not double dip and use the same medical expense in figuring the medical deduction and paying it (or reimbursing it) by an HSA. The year does not matter.

 

[gauss]

OK, I did a little more searching and that seemed to be the consensus, though in places no more official than forums like this. I'll update my HSA spreadsheet with the full Sched A line 1 amount from that year, with a note to check again for myself if line 4 could be used instead in case I want to withdraw more.

The quote that I provided above was from the United States Code.

It is much more official than this or any other forum.

It says to me that qualified medical expenses used for the purpose of tax-free withdrawals from an HSA cannot be used as medical expenses for the purpose of a Schedule A.

You would need to amend your Schedule A for the prior year and not take the medical expense deduction if you wish to pull the funds from the HSA tax-free as qualified medical expenses.

 

[RunningBum]

The quote that I provided above was from the United States Code.

It is much more official than this or any other forum.

It says to me that qualified medical expenses used for the purpose of tax-free withdrawals from an HSA cannot be used as medical expenses for the purpose of a Schedule A.

You would need to amend your Schedule A for the prior year and not take the medical expense deduction if you wish to pull the funds from the HSA tax-free as qualified medical expenses.

I know it was, but it wasn't clear (to me, anyway) that it applied to using it in a later year. The way it was worded, it was only clear that you couldn't take the withdrawal, and then include the same amount on schedule A.

What I was thinking of is something like the capital loss carry over. I put my total loss on schedule D, but if I don't have enough gains, I'm limited to a $3000 loss that year. However, I can use the rest of the loss the next year.

The foreign tax credit carryover is also like this.

I know this isn't the exact same thing but it is similar, at least somewhat. I understand there are differences too.

I will be conservative and not use any of the expenses in that year for HSA withdrawals, unless I can find something definitive that says I can, which I doubt I'll be able to find.

 

[gauss]

Ahhh - Okay - Sounds Good!

-gauss

 

[Z3Dreamer]

gauss, what you pointed out on code section 223 is pretty on point. I don't like it and I hope it is wrong, but after reading it about 4 times, I think it is correct. Or at least, it is the closest thing to my situation. Thanks for finding it.

So in my example, I lose $10,000 in withdrawals in exchange for a $4,000 deduction. This deduction may save me 20% or $800 in federal and state taxes. So, in the long run, I will have enough expenses to pay it out tax free. I have to decide whether the $800 "fee" for taking it out early is worth it. Right?

 

[Senator]

gauss, what you pointed out on code section 223 is pretty on point. I don't like it and I hope it is wrong, but after reading it about 4 times, I think it is correct. Or at least, it is the closest thing to my situation. Thanks for finding it.

So in my example, I lose $10,000 in withdrawals in exchange for a $4,000 deduction. This deduction may save me 20% or $800 in federal and state taxes. So, in the long run, I will have enough expenses to pay it out tax free. I have to decide whether the $800 "fee" for taking it out early is worth it. Right?

Have you had any medical expenses you can reimburse yourself for, for prior years? Even 10+ years ago?

 

[Z3Dreamer]

Have you had any medical expenses you can reimburse yourself for, for prior years? Even 10+ years ago?

Yes, but those are easy to compute, list, etc. Problem is now that I am retired and income is much less, I will be able to itemize medical every year. Further problem is that I have been putting more into HSA than I have been incurring. And those investments are doing much better than expected. So, and this is a great problem to have, I have $46k in HSA funds and only $25K in eligible expenses, if Gauss is correct. Which I think he is.

Eventually, I will draw it all out, its just that it might take a little longer.