• Luther, age 54, and Lexi, age 56, are married and file a joint return. • Lexi has family coverage through her High Deductible Health Plan (HDHP) at work. In 2023, Lexi contributed $2,350 to her Health Savings Account (HSA). Luther made contributions totaling $3,000 to his HSA in 2023. • Luther's Form 1099-SA shows a distribution from his HSA of $3,000. They have receipts showing they paid: o $300 for new eyeglasses for Lexi, o $2,200 in copays for doctor visits and tests, o $400 for over the counter medication, and o $100 for Personal Protective Equipment (PPE) to prevent the spread of COVID-19 and home COVID-19 tests • In April 2023, Luther was diagnosed by his physician with a terminal illness. In May, Luther and Lexi decided to take a luxury vacation before his health deteriorated. They used a distribution from Luther's IRA to pay for it. They received a Form 1099-R showing $15,000 in Box 1, and code 1 in Box 7. • Lexi sold a used handbag on an online marketplace. She received a Form 1099-K reporting the $700 sale. She originally paid $1,000 for the bag. • Luther and Lexi are U.S. citizens with valid Social Security numbers. 7. How much of Luther’s Form 1099-SA amount is taxable? a. $0 because they had qualified medical expenses of $3,000 b. $100 because PPE is not a qualified expense for 2023 c. $300 because Luther can’t use money from his HSA to pay for Lexi’s medical expenses d. $400 because over the counter medicine is not a qualified medical expense

For distributions from an HSA to be tax-free, they must be used to pay for qualified medical expenses. According to IRS guidelines, qualified medical expenses include costs for diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They also include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Based on the information provided: - $300 for new eyeglasses for Lexi, - $2,200 in copays for doctor visits and tests, - $400 for over-the-counter medication, and - $100 for Personal Protective Equipment (PPE) to prevent the spread of COVID-19 and home COVID-19 tests All of these expenses are considered qualified medical expenses. The IRS has specifically included PPE as a qualified medical expense due to the COVID-19 pandemic, and the CARES Act has allowed for over-the-counter medications to be considered qualified medical expenses without a prescription. Since Luther and Lexi have receipts showing they paid a total of $3,000 for qualified medical expenses, and Luther's Form 1099-SA shows a distribution from his HSA of $3,000, the entire distribution is used for qualified medical expenses and is therefore not taxable. The answer is: a. $0 because they had qualified medical expenses of $3,000

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