BillM223
Expert Alumni

State tax filing

"This still leaves the question of Arizona in the air since the money was withdrawn while I was an Arizona resident. " - As I noted above, it does not matter when the excess HSA contributions are withdrawn. The excess is added to your federal Other Income the moment that the excess is detected by TurboTax.

 

"Would Arizona also tax the withdrawn money as income? " - Yes, because the excess contributions are added to federal Other Income, which flows to Arizona state income.

 

"the withdrawn money is taxed by both California and Arizona." -- to repeat, the excess contributions (whether are not they were withdrawn is completely irrelevant) are NOT taxed by California. As noted above, California starts with federal adjusted gross income, then adds and subtracts HSA items to undo what was done on the federal return. This includes adding excess contributions to Other Income.

 

"Since the withdrawal happened while I was an Arizona resident" - please stop dwelling on when the excess amount was withdrawn - it is irrelevant. If the excess amount is never withdrawn, it is still added to Other Income on the federal return as soon as TurboTax detects the excess contribution. And it is still ignored in California because it is not possible to have an excess contribution to an HSA in CA, because HSAs are not special accounts in CA. The excess amount will be taxed in Arizona no matter what because this flows from the federal return to Arizona no matter what happens in CA.

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