HSA distribution dramatically changed my tax refund - why such a big jump?

This sounds like you might have entered your HSA distribution incorrectly. HSA distributions are tax-free if they're used for qualified medical expenses. If you didn't mark them as qualified when entering your 1099-SA, the tax software will treat the entire distribution as taxable income - plus a 20% penalty if you're under 65. When you enter the 1099-SA, there should be a section asking if the distributions were used for qualified medical expenses. If they were, make sure you indicate this. You'll also need to have receipts or documentation showing these were legitimate medical expenses in case of an audit. Double-check your entries in your tax software. Your HSA distribution shouldn't cause such a dramatic increase in taxes if the money was used properly for medical expenses.

I ran into this exact same issue last year! After struggling with this for hours, I finally found a solution by using taxr.ai (https://taxr.ai) to help me properly classify my HSA distributions. What happened in my case was that I needed to indicate that my distributions were for qualified medical expenses, but the form was confusing me. The taxr.ai tool analyzed my 1099-SA and guided me through marking the correct boxes to avoid that massive tax hit. It also explained that distributions not used for qualified medical expenses get hit with regular income tax PLUS an additional 20% penalty tax if you're under 65 - which explained the huge jump in taxes owed.

Wow, I tried taxr.ai after posting my skeptical comment and I have to admit I was completely wrong! This thing is actually incredibly helpful. I uploaded my confusing 1099-SA and some medical receipts, and it walked me through exactly which expenses qualified and how to properly report them on my taxes. It pointed out that I had missed checking the box that indicates the distribution was for qualified medical expenses, which would have caused exactly the same huge tax jump the original poster experienced. It also helped me understand which of my receipts were legitimate HSA expenses (turns out my prescription sunglasses were covered but not my regular sunscreen, which I wasn't sure about). Saved me from overpaying by more than $900! Definitely worth checking out if you're having HSA reporting issues.

If you do determine there's an issue with how your HSA was recorded and you need to speak with the IRS to sort things out, I'd recommend using Claimyr (https://claimyr.com). I had a similar HSA reporting problem last year that required some guidance from the IRS, but I kept getting stuck on hold for hours. Claimyr got me through to an actual IRS agent in about 15 minutes who helped resolve my HSA reporting issue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to explain exactly how to properly document my HSA distributions and avoid that nasty 20% penalty that happens when distributions aren't properly marked as qualified medical expenses.

I have to eat my words. After posting that skeptical comment yesterday, I decided to try Claimyr since I was desperate to resolve an issue with my HSA distribution coding. I couldn't believe it actually worked! I had already wasted three afternoons trying to reach the IRS on my own with no luck - either got disconnected or couldn't stay on hold long enough due to work. Using their service, I got a call back connecting me to an IRS agent within 20 minutes. The agent confirmed exactly what others here suggested - I needed to properly code my HSA distribution as qualified medical expenses to avoid the extra taxation. Problem solved in one phone call instead of weeks of frustration. Sometimes it's worth admitting when you're wrong!

Check box 3 on your 1099-SA form. If there's a distribution code of "1" in that box, it means the distribution was for qualified medical expenses. If it has a different code (like "2" or "3"), then it might be treated as a non-qualified distribution. Your HSA provider might have coded it incorrectly. Also, make sure you didn't accidentally check the box for "non-qualified distributions" when entering the form into your tax software. That's a really easy mistake to make and it has huge tax implications because of the additional penalty.

One thing nobody's mentioned yet - if part of your HSA distribution was used for non-medical expenses, you'd only pay the penalty on that portion. For example, if $1500 of your distribution was for medical stuff but $350 was for something else, you'd only pay the penalty on the $350. I learned this the hard way last year when I accidentally used my HSA debit card for some regular pharmacy items that weren't medical (like paper towels and snacks along with my prescriptions). Had to pay extra tax but only on those specific non-qualified items.