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HSA Withdrawals for Past Years Expenses


Guest zara
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Can medical expenses be withdrawen tax free from HSAs which were expenses incurred in past years which were not deducted due to being under the 7.5% threshold for the medical expense deduction even though expenses above 7.5% were deducted in those years? Also, can medical expenses which were not allowed because of high income limitations on schedule A deductions be withdrawen tax free?

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I don't know the answer to your specific questions off the top of my head but I do know that an HSA can reimburse an otherwise qualified expense that was incurred in a prior year if the HSA was established before the expense was incurred. Check out Notice 2004-50.

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223(f)(6) says:

"(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."
In short: an expense that has been used to take a distribution from an HSA cannot be used on 1040 Schedule A as a medical expense. If it cannot be included in 1040 Sch A Line 1 then it is entirely irrelevant what happens further down on that schedule (ie the 7.5% on Line 3).
You can use an expense for an HSA distribution or for an itemized deduction, but not both.
It's moot that it's from a prior year.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Just to make sure, I want to clarify that I did not make any withdrawals from my HSA in past years but was using my HSA as savings account. My medical expenses always exceeded the 7.5% threshold and some years my Schedule A deductions were further limited because of high income. (even though I am not sure if medical expenses were further limited) So, now I am wondering if those expenses which I could not take because of the threshold or any limitations can now be withdrawen tax free. I think Mastiff understood this and gave me a correct answer, but just wanted to make sure. Thank you.

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From Notice 2004-50 that Chaz mentioned above (emphasis added)...

"Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?

A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA."

Based on the code section above, "taken as an itemized deduction" means the amount entered on Sch A Line 1, regardless of what amount ultimately flows to Form 1040.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Again, I'm not sure that's right. An itemized deduction is an amount deducted. If it's a component that enters into calculation of the amount deductible, it's not an itemized deduction unless it was allowed as an amount deductible.

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Interesting. So, if in a year you have out-of-pocket medical expenses of 7.49999% of your AGI you can be fully reimbursed for those expenses out of your HSA many years later. However, if your total out-of-pockets for a year were 7.50001% of your AGI and you claim a deduction for the 0.00001%, you can't apply any HSA distributions to your out-of-pockets for that year. You may be right, but it's a very strange result.

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jpod (and zara) - another thought occured to me that might help explain...

Expenses reimbursed by FSA, HSA and MSA distributions are not allowed by the IRC to be deducted because those accounts are primarily funded by pretax money (FSA contribs excluded from W-2 earnings and HSA and MSA deducted on Form 1040). You got your tax savings when you put the money into one of those special tax advantaged accounts so it would be double-dipping on tax savings if you also deduct a distribuition-related expense.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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  • 1 year later...
Guest taxaddict

Try to explain this a little more as I think the concept is being lost on some of the replies:

You contribute to an HSA pre-tax through payroll or get a deduction form your AGI for the contribution in the year you make it.

You can use these contributions to pay medical expenses any year, but you can't claim these expenses on your schedule A for another deduction. Most people will not meet the now 10% of AGI limitation to receive a benefit from claiming health expenses itemized deductions.

So basically the HSA saves you taxes on your medical expenses but you get the discount when you contribute it rather than having to wait til you spend it and then claim it on a tax return (and pass teh 10% test losing the benefit for that portion).

If you don't pay from HSA and claim medical expenses on a sch A you cannot reimburse any amount from that year later with your HSA funds. Even though you don't get a decution for the first 10% (7% pre-2013), your still using these expenses on your schedule A to claim the amounts over the 10%.

Think of it this way:

I had 100k AGI so only medical expenses I had over 10k i could claim deduction for. If i claimed 12k in expenses the amount I could use on my Sch A was 2k.

Two years later I think "Hey, I want to pull that 10k out of my HSA", I would basically be washing the amount used to allow that other 2k to be claimed and technically only then have 2k of medical expenses that year which would allow for no Sch A deduction.

Two options here, 1) don't claim the medical expense on your Sch A and keep track of it all to allow for later tax free withdrawals form your HSA, or 2) Know that claiming the itemized deduction will limit you from using any of that year's medical expenses as a qualified tax free distribution from your HSA account.

Hope that makes it a little more clear; basically if you claim any medical expenses on your sch A even if only 1 dollar over the AGI limitation, you lose the HSA tax free distribution benefit of those medical expenses.

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Speaking as a taxpayer and not a tax expert:

Doesn't one have to put in the claim for reimbursement of the prior year expenses within three or four months of the end of the prior year? I thought that any amounts contributed to an HSA that were not claimed by the deadline in the immediately following year had to forfeited outright. So I don't understand the apparent question here about claiming unreimbursed amounts from years earlier, since they would have been forfeited long ago. Is this not so?

Given that in general any amounts to be reimbursed for last year's medical expenses from an HSA would have been reimbursed prior to the filing deadline for last year's taxes, I think the question comes down to whether you can count those expenses that were reimbursed towards the 7.5% threshold. It seems to me that the answer to that is no - in effect you never paid those expenses, because they were paid by the HSA, so you can't recognize them in any way in completing your taxes. You do need to be able to demonstrate that you had initially incurred or paid covered expenses to justify the reimbursements, however.

Always check with your actuary first!

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Guest taxaddict

From IRS Notice 2004-50:

"Time Limits on Tax Free Distributions Unlike a Section 125 plan, HSA expenses do not have to be incurred and reimbursed during the same year. HSA distributions may be deferred to later taxable years for expenses incurred in the current year. The only requirement is that the expenses must be incurred after the HSA was established."

Hope this helps clarify that you can reimburse the expenses anytime in the future (as long as not claimed for taxes on schedule A).

See also:

https://search.yahoo.com/search?fr=mcafee&type=B111US105D20140712&p=Notice+2004-50

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  • 1 month later...
  • 1 year later...

I have carefully kept receipts for medical expenses for several years. I have never itemized medical expenses on Schedule A. Now that my income is lower, I would like to itemize my Health Insurance premium amount for 2015.

I have also taken a distribution from my HSA in 2015, which I used to reimburse myself for those previous years medical expenses.

It is my understanding that I can do both of these things.

Any comments?

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  • 11 months later...

I realize this is an old post, however, in order to deduct health insurance premiums you must first determine if they were made pre-taxable income or post-taxable income.

If your received a tax benefit by deducting your health insurance premiums before your income was taxed, you cannot claim the expense of the premiums on your schedule A.  That would be considered double dipping.

If your premiums were deducted after your income was taxed, then you can only deduct the amount that exceeds your AGI by current percentage allowed for that year.  

From what I've read, you cannot deduct any expenses for 2015 if you were reimbursed for even $1 of 2015 expenses.  For the prior years', I'm not sure.  I'm just responding to the premiums and whether they were deducted from income before tax or after.

 

 

 

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