Your entry method is correct [although the amounts you've entered might be incorrect; see my later comment below].
The increase in CA tax makes sense since CA does not conform to the federal deduction for HSA contributions.
[Disregard this paragraph. The explanation is in my comment later comment below] The increase in federal taxes is a bit puzzling. Perhaps it's the result of a side effect of the reduction of your AGI, maybe a reduction in Earned Income Credit. Compare your Form 1040 with and without the HSA contribution entry to see where the increase in tax is coming from. Check to see that Form 8889 shows $1,937 on line 13 when the HSA contribution entry is present.
