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About 10% of my income is taxable in the state of CA, why is ALL my HSA contribution lumped in?

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Level 13

About 10% of my income is taxable in the state of CA, why is ALL my HSA contribution lumped in?

TurboTax doesn't have a good automatic way to know what state to allocate HSA contributions to, so, by default, the entire amount is allocated to California.

You will need to manually adjust the California income for a part-year resident (or non-resident) to remove the add-back for the HSA contributions.

To recap: the federal tax return permits contributions to an HSA to be deducted from federal income tax (up to a limit). However, California does not permit this deduction. Therefore, California, by default, adds the total amount of the HSA contribution back to the federal income, on the assumption that you were a California resident all year.

However, for part-year residents and non-residents, a manual adjustment needs to be done.

Go to State Returns, and navigate to your California return.

As you proceed through the interview, you will be asked under General Info questions concerning your residency. Indicate when you arrived (or departed) California. Make sure you do this before the Income section.

In Income and adjustments, proceed through the interview.

You will notice on the first page ("Here's the income that California handles differently") the first item is (likely to be) "Health Savings Account (HSA) Contributions". Here TurboTax notes that the amount of your HSA contribution has been added back to the California return.

NOTE, despite the Edit button, you can't change this here.

Instead, click on "Done with Adjustments". The next screen will be "Nonresident Adjustments".

Next, the program will ask you a series of questions over several screens about your California based W-2 income, your other California income, and your California business income (if any).

If you received HSA contributions that were attributable to California source income, then you need to take your total HSA contribution and prorate for California vs the other state, entering it under "other California income". Let's say that your income and HSA contribution was the same between the two states and you spent 5 months in California - in that case, you would allocate 5/12ths of the HSA contribution to California.

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