Yes, the federal does not tax it and California does not allow the deduction. In short, no HSA contribution is deductible in California, no matter where it came from.
If California added back the code W amount, then this is correct. If you also made "personal" - that is DIRECT (not through your employer)- contributions (which appear on Schedule 1, line 12 ), these would appear somewhere else on the CA return as an adjustment.
Key Point:
- Check your W-2 to see whether or not your CA state wages on your W-2 already have the HSA contributions added back in by your company. Some companies do this.
This, however, confounds TurboTax because it does the HSA addback automatically and has no way of knowing if the employer included it or not. If your employer includes the HSA contribution in state wages (i.e., state wages are higher than federal wages by the amount of the code W amount), then you will need to back out the TurboTax addback because it would double the impact on state wages.
You would do this by reading the following:
The current TurboTax software assumes that the California state wages reported in box 16 will not have the HSA contributions added back. But some employers do add the HSA contributions back to state wages reported on the W-2.
In this case, you can counteract the TurboTax automatic adjustment by going to the screen entitled "Here's the income that California handles differently" and looking at the bottom at the line "Other Adjustments to Income".
Click on Start and enter "Duplicate HSA add-back" for description and the amount of the HSA contributions as a Subtraction (so it will be subtracted from your state income).
Keep notes of what you did and why in your tax file, in case the state of California ever writes to you wondering what this "Duplicate HSA add-back" is.
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