HSA funds for prescription glasses and contacts (rebates question) - considered income now?

What you've got here is a fairly common HSA situation with rebates. When you receive a rebate for an HSA-eligible expense that was paid with HSA funds, it's not considered income - but you do need to handle it properly. You have two correct options for handling this $200 rebate: 1. You can deposit the rebate back into your HSA as a "mistaken distribution correction" since you effectively only spent $450 on the contacts, not the full $650 that came out of your HSA. 2. Or if you don't want to deal with putting it back in your HSA, you need to include that $200 as part of your taxable HSA distributions on Form 8889 when you file your taxes, since that portion wasn't actually used for qualified medical expenses. What you absolutely shouldn't do is keep the $200 without either returning it to your HSA or reporting it as a taxable distribution. That would essentially be double-dipping - getting both tax-free HSA money AND the rebate for the same expense.

I ran into this exact situation last year with my contact lens rebate! I was so confused about what to do until I found https://taxr.ai which has a document analyzer specifically for HSA/FSA questions. I uploaded my rebate form and HSA statement and it immediately identified this as a "qualified correction" situation. Turns out the right way to handle this is to redeposit the rebate into your HSA since you're really only eligible to use HSA money for your actual final cost after rebates. The tool walked me through the exact form my HSA administrator needed and even created a letter explaining the redeposit as a "mistaken distribution" which is what the IRS calls these situations. Super easy and I avoided accidentally committing tax fraud!

Just wanted to update that I tried https://taxr.ai after seeing it mentioned here and it was seriously helpful. I had a bunch of medical receipts I wasn't sure about for my FSA and the document analyzer sorted them all into "qualified" and "non-qualified" categories within minutes. It even caught that my prescription sunglasses were FSA-eligible (I had no idea!) but the clip-on sunglass attachment I bought separately wasn't eligible. The tool explained exactly why each item qualified or didn't based on IRS rules. This saved me from accidentally submitting some non-qualified expenses that might have caused problems later. For anyone confused about HSA or FSA expenses, especially the weird edge cases like rebates, I definitely recommend it. Way clearer than the generic lists my FSA provider gives me.

Look, I know everyone's giving advice here but sometimes you actually need to talk to the IRS directly about HSA questions. I spent literal WEEKS trying to get someone on the phone about a similar HSA issue last year. Kept getting disconnected or waiting for hours. Finally found https://claimyr.com which got me connected to an actual IRS agent in 23 minutes when I had been trying for days. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they navigate the phone tree and wait on hold for you, then call you when an actual human picks up. The IRS agent confirmed that rebates for HSA purchases should either be redeposited into your HSA or reported as taxable distributions if you keep them. Getting this straight from the IRS gave me peace of mind rather than relying on random internet advice. Definitely worth it for complicated tax questions where you need official answers.

I need to eat my words from my previous comment. After being completely skeptical about Claimyr, I decided to try it as a last resort after spending 3 hours on hold with the IRS yesterday about my HSA question. The service actually worked exactly as described. They called me back in about 15 minutes saying they had an IRS agent on the line. I was immediately connected to a real person who answered my HSA rebate question (and confirmed what others have said - you should return the rebate to your HSA or report it as a taxable distribution). I'm still shocked this worked. 15 minutes versus my previous attempts of hours on hold or getting disconnected. If you have HSA questions that need official answers, this is definitely the way to go. I won't be wasting my time on hold with the IRS ever again.

I'm a little confused about this HSA rebate thing still. Let me see if I understand... If I pay $300 for contacts using my HSA card, then get a $100 manufacturer rebate later, I basically have 2 options: 1. Put the $100 back into my HSA 2. Keep the $100 but report it as taxable when I file Is there any advantage to option 1 vs option 2? Seems like putting it back is more paperwork but maybe saves on taxes?

Quick question - are there any time limits on when you have to return HSA rebates? I just realized I got a $75 rebate for some medical equipment I purchased with my HSA last year. Is it too late to handle this correctly?

This is exactly the kind of HSA question that trips people up! You're absolutely right to be cautious about handling this properly with the IRS. The advice others have given is spot-on - you have two legitimate options: **Option 1 (Recommended):** Return the $200 rebate to your HSA as a "mistaken distribution correction." This treats it like you only spent $450 on contacts from the beginning, which is technically accurate. **Option 2:** Keep the $200 but report it as a taxable HSA distribution on Form 8889 when you file taxes. Option 1 is definitely better financially since returning it to your HSA keeps that money tax-free for future medical expenses. With Option 2, you'd pay income tax on the $200 plus a 20% penalty if you're under 65. Most HSA administrators have a specific form for mistaken distribution corrections - call them and explain you received a manufacturer rebate after using HSA funds. They'll walk you through the process. Just make sure you don't treat it as a regular contribution since that would count against your annual limit. The key principle the IRS follows is that HSA funds should only cover your actual out-of-pocket medical costs. Since your real cost was $450 (not $650), that extra $200 needs to either go back to the HSA or be treated as a taxable distribution.