Csdrhrt

I understand that qualified withdrawals from HSA are tax free. If I am right in my understanding, then why are withdrawals deducted from the HSA contribution on form 8889 to determine the tax-deductible HSA contribution?

To be specific, Line 10 "Qualified HSA funding distributions" is to be subtracted from the HSA contribution to determine the HSA deduction from taxable income.

I made withdrawals but they are qualified. Why then should I deduct them from my HSA contribution?

I made withdrawals but they are qualified. Why then should I deduct them from my HSA contribution?

You shouldn't, it sounds like you're putting that number in the wrong part of the form.

Line 10 of Part I (Qualified HSA funding distributions) does not refer to distributions from your HSA used to cover qualified health expenses, but rather distributions from other accounts used to fund your HSA. The Form 8889 instructions state:

Line 10 Enter on line 10 any qualified HSA funding distribution made
during the year. This is a distribution from your traditional IRA or
Roth IRA to your HSA in a direct trustee-to-trustee transfer. This
qualified HSA funding distribution is not included in your income, is
not deductible, and reduces the amount that can be contributed to your
HSA by you and from other sources (including employer contributions).
This distribution cannot be made from an ongoing SEP IRA or SIMPLE
IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an
employer contribution is made for the plan year ending with or within
your tax year in which the distribution would be made.

The distributions you are referring to are recorded in Part II (HSA Distributions). The Part 1 Line 10 name is a bit confusing on it's own, but it makes a little more sense in the context of the section of the form. Part I is "HSA Contributions and Deduction" so all about how the HSA was funded and what portion of those funds are deductible.