I received one 1099-R for 3 distributions from my IRA. Federal Taxes and State Taxes were withheld for 2 distributions not the 3rd. Does California tax the 3rd, a QHFD?

[hongengnewman]

Federal Taxes done a-ok. CA tax-prep with Turbo Tax not going well because of instructions about the 3rd distribution amount to add or subtract from the Federal Taxable amount. The 3rd distribution amount is already streamed in the Addition column. Does it mean the 3rd distribution is totally taxable by California? Should I delete the 1099-R and do each distribution separately?

[dmertz · Accepted solution]

Yes, the third distribution for the HSA Funding Distribution is taxable by California because California does not conform to the federal regulations for HSAs.  California treats them similarly to a regular investment account, requiring any HSA contribution to be added to California income.

[hongengnewman]

Could Turbo Tax be behind the times? I found a document by State of California's Franchise Tax Board dated January 3, 2022, titled "Health Savings Account Deduction Conformity" - has the bill been passed so that HSA earnings are not taxed, and the QHFD is not taxed and the direct IRA to HSA distributions is also not deductible like the Federal Treatment.

So, if the bill is not passed yet, then how do I do the Turbo Tax worksheet - simply leave the QHFD amount in the Additions column and move on? I could not wrap my head around the TurboTax instructions as the single 1099-R is a composite of the 3 separate distributions with fed and state withholdings accurately summed. If the QHFD streamed correctly from the Fed 1040 prep on Turbo Tax, why even have me review it? I have already managed to find HSA earnings (without any REALIZED gain and loss) from brokerage statements and plugged that in while the QHFD done and needed to be crunched in CA tax-prep is regrettable. Glad it's almost one and done. So much for encouraging everyone to open HSAs, but not in CA yet?

[dmertz]

That bill apparently quickly died in committee.  There has been no change in California's treatment of HSAs.

[hongengnewman]

Ouch, what a hefty tax bill with California for my first year of residency here! Thank you. I would feel better if a TurboTax CPA puts its official seal on your reply. Isn't it in Turbo Tax's interest to have such questions officially answered from newbies unused to the CA cost of living. Gone blind reading CA's FTB website looking for the HSA Conformity that doesn't exist. Your level 15 answer is much appreciated. It is way better than the AI help-chat that kept throwing up Qualified Disaster whatever in my search for QHFD. Thank you for having replied so promptly. Case close. Entire QHFD amount to Addition then - which must mean add (back) to my taxable CA income then.