Preparing HSA withdrawal to deal with California tax situation

[fh2000]

I created this last thread:

https://www.early-retirement.org/forums/f28/is-hsa-withdrawal-counted-as-income-for-aca-117251.html

and I was given the fact that HSA withdrawals does not add to MAGI for ACA income calculation. This is good news to me. I thank you all who contributed.

Now, I am working on the actual withdrawals and preparing for the California tax.

1. I went back to old Turbotax folders, and extracted 10 years worth of Form 8889. This shows that we participated HDHP plan, and how much we contributed.
2. I went back to 3 HSA administration firms and extracted those year end statements that listed our fund purchase records. This is to establish the cost base for those shares that I am ready to sell. The capital gain for those shares are to be added to California as income.
3. This is the messy part. In order to satisfy the Federal return audit, I will need sufficient receipts for qualified medical expenses. I have some actual receipts with their corresponding credit card statements. But there are some I only have Credit Card statements and I did not save those receipts. I wonder if these will pass IRS audit? My guess is not, but I would like to hear if any of you have any thoughts on this.

 

[qwerty3656]

I am not an expert, but I would feel comfortable relying on credit card statements. It's self reported and not something you have to provide documentation when you file. It reminds me of when we withdrew 529 funds for the kids college.

 

[cathy63]

I personally would be o.k. with credit card statements showing medical expenses. If it turns out that the IRS is not o.k, it's only going to be a problem if they actually audit you. If they do and they disallow some expenses that you claimed, then you will just pay the tax due at that time.

 

[audreyh1]

For some reason DH is having a hard time getting into the part of the Medicare.gov website that shows billing payment history. Errors/timeouts - used to work. Annoying as this is our preferred form of HSA qualified distributions documentation.

However we have the Fidelity HSA history saved that shows all the payments to CMS Medicare during 2022 as well as the mailed billing statements. So I suppose that’s good enough.

Hopefully the Medicare.gov site starts working again soon. That’s annoying!

 

[pb4uski]

Do you have or can you access any of your health insurance Explanation of Benefit statements? those will typically show what services were provided, how much was covered by insurance and how much you were responsible for... and hopefully you can match those to credit card statements or receipts.

I suspect that the audit risk for this sort of thing is quite low.

 

[fh2000]

I personally would be o.k. with credit card statements showing medical expenses. If it turns out that the IRS is not o.k, it's only going to be a problem if they actually audit you. If they do and they disallow some expenses that you claimed, then you will just pay the tax due at that time.

This gives me an idea. I can try withdraw smaller amount each year and gradually draw down HSA balance. If I am not audited, those years are supported by the Credit Card statements. In the event of an audit, I can always present the ones with receipts and payment statements.

IRS does not care about the orders of the medical services, as long as I do not submit the same payments in multiple years, right?

 

[pb4uski]

I don't think the IRS cares how many withdrawals that you do, they only care that all withdrawals are for eligible medical expenses if you are not declaring the withdrawal as income. Also, the eligible medical expenses could be yesterday or 10 years ago... they don't care as long as it is eligible and, of course, only taken once.

 

[cathy63]

This gives me an idea. I can try withdraw smaller amount each year and gradually draw down HSA balance. If I am not audited, those years are supported by the Credit Card statements. In the event of an audit, I can always present the ones with receipts and payment statements.

IRS does not care about the orders of the medical services, as long as I do not submit the same payments in multiple years, right?

Yes, the IRS doesn't care in what order you reimburse yourself. They only care if the expenses are eligible and that they were incurred after the HSA was established.

If you had or will have premiums for Long Term Care Insurance, Medicare or COBRA after establishing your HSA, those are automatically considered eligible expenses and are usually easy to prove. As audreyh1 does, I'm planning to use our HSAs for Medicare premiums.