HSA and Medical Expense Deduction

[gettingthere]

I'm looking for clarification on the rules for medical deductions vs. paying for medical expenses from HSA funds.

Say I have an AGI of $50,000 in 2017. I understand I can deduct medical expenses exceeding $5,000.

Say my medical expenses were $7,000 in 2017, I should be able to deduct $2,000.

Can I use HSA funds to reimburse myself for the first $5,000 of my $7,000?

My gut says no, but I have not been able to find anything via Google that explicitly says that.

 

[nvestysly]

I suspect somebody with more expertise than me will reply but I'll tell you how I approach this when I file taxes via TurboTax...

We use an HSA so the annual contribution to the account is tax deferred. The contribution amount is accounted for on the first page of the 1040. This reduces our income so we are paying less taxes. Any medical expenses are paid via HSA funds and are therefore tax free.

So in our situation your gut is right. We don't further account for medical expenses when we itemize because all of our expenses have already been paid with tax free money. Otherwise, it seems you would be doing some sort of double-dipping and the IRS would not like that.

 

[gauss]

1) The Medical Expense threshold for 2017 has been lowered from 10% to 7.5% (your example is based on the old threshold of 10%)

2) No double dipping - you can't apply HSA qualified distributions to expenses that you have claimed on Schedule A (in current or prior years). This includes the part that you need to overcome to get to 7.5%

I think this is called out in the IRS HSA form instructions and/or publication. Let me know if you need the actual reference.

-gauss

 

[gettingthere]

Thank you both.

 

[karen1972]

I just went through this with Turbotax.

TurboTax had me fill out the HSA distribution first, then it asked about medical expenses (note you don't enter ACA premiums here), and then it says , so we see that you had an HSA distribution of X we assume you used 100% of it towards these qualified medical expenses... of which of course you say yes, and then they subtract X from your medical expense total.

Then if you had ACA, at the end you fill that part out about premiums because they have to re-calculate your ACA credit based on actuals so that they know how much you actually owe for insurance premiums since you have to settle up at tax time.

It then goes back in and puts the final insurance premium total into your medical expense to determine if you met the 7.5% threshold.

 

[gettingthere]

Thanks, Karen. I should have tried it in Turbotax, but did not, because I did not put in for reimbursement of any expenses yet from HSA, but was wondering about using HSA for these expenses this year or in future years.

I will just have to add to my notes that I cannot reimburse any 2017 medical expenses.

2017 was the first year I had an HSA, and coincidentally the first year I ever had high enough medical expenses to deduct. I retired at the end of January 2017 last year and had much lower income than previously, 11 months of COBRA medical and dental to count toward the 7.5%, plus a pricey scan that insurance would not cover, plus dental work.

I maxed out my HSA contribution for 2017 and the 6 months worth I am able to contribute this year (I turn 65 in July) and am trying to decide if maintaining the HSA account is worth the hassle, since the balance is not large, or if I should just start using the funds.

 

[RobbieB]

I've always used the funds as they were intended; to pay medical expenses.

Rx drugs, co-pays at check in, lab fees billed, Rx glasses and the dentist.

 

[RunningBum]

We had a recent thread where I unsuccessfully argued that only the part above 7.5% or 10% or whatever the threshold on schedule A could not be used for HSA withdrawals. Others convinced me that the full amount you put on schedule A, including the part that got you to the threshold, was ineligible. I don't remember what the source was. A search of the last 6 months might find it.

HSAs are kind of funny. A lot of places either have low rates on fixed investments, or charge high expense rates. If you don't have much money in one, I'd say it probably isn't worth keeping open if you have expenses to take.

I had a few healthy years when I first opened an HSA so I couldn't withdraw it all (penalty and tax free) if I wanted to. I was getting 1.5% fixed with no fees at my CU, which isn't terrible. My account got large enough that I just moved my account to SelectAccount, where I can invest more aggressively with small fees--I think $30/year. If you only have $3000 there, that's 1% (too high for my tastes), but if you have $30K, that's 0.1% (much better).

I like keeping the HSA as an emergency fund of sorts. I can take what I'm allowed in past medical expenses with no taxable income. I like to have that option in my pocket rather than withdraw it in a year where I have room to take income.

 

[MichaelB]

This is the thread RB is referring to, and post 3 by gauss has the appropriate reference to the tax code on this topic. http://www.early-retirement.org/forums/f28/distributions-from-an-hsa-88977.html

 

[bingybear]

HSAs are kind of funny. A lot of places either have low rates on fixed investments, or charge high expense rates. If you don't have much money in one, I'd say it probably isn't worth keeping open if you have expenses to take.

+1
If you have a very limiting HSA it is likely better to redeem the expenses. I have not redeemed any of my HSA, but have kept the receipts as I can redeem later if I want. But I have an HSA where I can invest the assets. I'm using this as a vehicle to create a tax free fund for paying for health care in later years. After 65 the rules change and the HSA can do more.