How do I adjust HSA contribution paid by TX employer on CA return?

[DanZ]

I relocated from California to Texas in Aug 2018.  My new employer in TX has an HSA and my employer in CA did not have an HSA.  How do I back out the contribution to my HSA on my CA return?  This income should not be taxable in CA because it was sourced from my TX employer after I relocated.  TurboTax will not let me edit the HSA contribution on the CA state return.  The field is not editable.

[DanielV01 · Accepted solution]

California does not tax the HSA contributions you made prior to moving to California.  However, California uses all of your income to determine California tax by California law.  Since California does not allow a deduction for an HSA, it pretends that all of your income (including the HSA contribution) is taxable in California, computes the tax, and then prorates your tax to the amount of income you actually earned in California.  Thus, while your HSA is not taxed in California, it is factored in to calculate California tax.

[DanZ]

Daniel, Thank you for replying but I don't fully understand your answer.  As a test, I entered 0 for box 12 (code W) on my W2 and my tax due in CA went down.  If the HSA isn't being taxed in CA, the tax due in CA would have stayed the same when I changed box 12 to 0 on my W2.  The fact that the tax due went down when I changed it to 0 indicates that some portion of the HSA contribution is being taxed in CA.   On what form is the proration done?  Maybe I can look at the calculations to see what's going on.  Thank you.

[DanielV01]

The calculations are on the tax return themselves.  Since you are using desktop, use "Forms Mode" to look at the California return.  The nonresident return will have a "Federal Amount" and a "California Amount".  The Federal amount will include the HSA.  The California amount will not.  The prorate will be the California amount divided by the Federal (including the HSA).  California tax is calculated on the full Federal amount, and then prorated using the formula I just described.  The HSA is not directly taxed.  However, when factored in to the Federal column to determine the imaginary tax, it can raise the tax a bit if you are in a higher CA tax bracket because of your income than the tax rate at which you were withheld in California.  I just duplicated your situation to see for myself, and the tax did go up a little bit including or excluding the HSA amount.  However, that is CA law.  The HSA is factored in to determine your CA tax.

[DanZ]

Thank you very much.  I found a similar question on this site that recommends backing the HSA contribution out in the Non Residents screen.  Is this correct?  One thing that I don't understand about that answer is it recommends entering 0 for the adjustment.  Shouldn't it be a negative number equal to the HSA contribution?  The link is <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4176100-my-hsa-contributions-from-job-in-tx-are-showing-up-on-ca-r...>

[DanielV01]

When I did my sample, the HSA is not included in income on the California column.  It is included on the Federal side and cannot be adjusted.  I'll try to show an example:
Pretend that your TX income is 50,000 and your CA income is 50,000, and you made an HSA contribution for 5,000 while working in TX.  California will calculate tax, not on 100,000, but on 105,000.  The California percentage of tax is 50000/105000 or 47.61%.  For arguments sake, let's say that if the HSA were not factored in, CA tax on 100,000 is 4000 and on 105,000 (with the HSA, higher tax bracket), it is $4250.  The "non" HSA amount would produce CA tax of $2000 (on 50% of income against the 100,000 total), whereas with the HSA factored in, the tax is $2023 (47.61% of the 105,000), whic is $23 more tax when the HSA is factored in.  Even though the HSA is not included in the California income in either case, the amount still moves because of how CA does their tax calculation.  I agree if it sounds a bit convoluted, but I hope you can see this on the return.  You should make sure that you follow the steps above to ensure the CA income reported is excluding the HSA from the CA column, but it will not be excluded from the Federal column.  

[DanZ]

I understand, Daniel.  Thanks very much for all of your time!

[DanielV01]

I'm glad I could help you.