Tax Help With HSA Reimbursments
This is a tax scenario question regarding the timing of when to reimburse oneself from an HSA for medical expenses:
-In order to take a itemized tax deduction for qualified medical expenses, the medical expenses need to exceed 10% of AGI and must not have been paid for previously with HSA dollars.
-Tax Strategy: Pay all qualified medical expenses with “out of pocket” dollars especially in years when you are certain that these medical costs will exceed 10% of AGI. The amount above the 10% of AGI becomes tax deductible and the amount equal to 10% of the AGI is eligible for HSA reimbursement at a later point in time (years later even)?
-What seems clear is that you cannot include medical expenses that have already been reimbursed with an HSA in the itemized medical expense calculation, but why not pay these expenses “out of pocket” first, take the tax deduction if these expenses exceed 10% of AGI then reimburse oneself (with HSA dollars) later for the 10% of AGI that wasn’t deductible?
Am I missing something here? Thanks in advance.
Permalink Submitted by Alan - IRA critic on Sat, 2017-02-04 19:09
This is a confusing issue, made worse by a bullet point in the Pub 969 Inst that does not dovetail with the statement in Pub 502 regarding HSA reimbursements. Pub 969 fails to clarify whether the 10% AGI floor used to limit the medical deductions counts as amounts “deducted”. You actually cannot deduct that 10% but you do use that 10% to generate the amount that you do actually deduct. Now if you take a current HSA distribution to pay current year expenses, those expenses are no longer qualified medical expenses and you cannot even count them if calculating your Sch A Medical deduction (similar to pre tax health insurance premiums. This is quite clear, but when you reverse the order by itemizing your medical on Sch A, then years later after that tax year has closed, you decide to reimburse yourself for the 10%. The same issues apply, but in a different order. Your Sch A is now locked in and used all your expenses if you exceeded the 10%, therefore all those expenses were treated as qualified medical expenses and not eligible for HSA reimbursement. In any event, here is an entire thread on this question: https://benefitslink.com/boards/index.php?/topic/54052-hsa-withdrawals-for-past-years-expenses/I agree with masteff’s position. The implications are that when you file Sch A you need to think about what your strategy is with respect to future HSA reimbursements. Accordingly, if the 10% eats up most of your medical costs, you should consider not itemizing medical at all.
Permalink Submitted by Steve Hagedorn on Sun, 2017-02-05 00:01
That was an interesting thread that you linked. Thanks.Never would have thought of it the way it was explained.