How does Turbotax handle income in a HSA account which is state nondeductible in a nonconforming state like California?

[BillM223]

TurboTax handles it all automatically (but see below).

The contributions on the federal level are added to California state income. Excess contributions are not penalized in CA. Distributions that trigger a penalty are undone.

One thing that you have to handle yourself is reporting interest and dividends and other gains in the HSA, because CA treats the HSA as just an investment account, so you have to badger the HSA custodian for the investment income as if the HSA were a regular investment account - there is a screen in the California interview where you are invited to enter these amounts. Most customer service reps at HSA custodians have no idea what you are talking about, so you may have to ask for a supervisor.

So, really, don't be concerned; TurboTax has been doing HSAs in CA for many years.

[smhsmg]

Thanks for the reply.  I wasn't asking about contributions or distributions, for both of which there are simple required reports from the HSA account provider, but for gains incurred in the account.  I'll understand your "automatically" in the first paragraph as simple turbotax fanboy enthusiasm, belied by that "see below" paragraph, which essentially says that an HSA account owner in California (also New Jersey?) must slog through the detailed account history for the year to find any income to the account and adjust income via Cal 540 Schedule CA.  This might include any of Interest, Dividends, or Capital Gains or Losses (since HSA accounts can function as qualified investment brokerage accounts).  A real time-consuming slog -- hardly "automatically".

This would be simpler if brokerages issued 1099-B,Div,Int forms or something similar for HSA accounts that are not taxed federally but which might be in some states.  Customer-facing explanations at irs.gov claim that brokerages are REQUIRED to send 1099 forms, but that isn't the same as the actual regulation in the Tax Code that makes it so, nor the likely detail somewhere that exempts HSA and tax-qualified accounts.  In principle one could search out these things in the tax code, except that human life is too brief to waste so much of it.

California has 2023-4 SB230 under consideration which would bring California into compliance.  There has been something like SB230 many sessions in the recent past, but it never seems to make it through passage.  Pity!  While the lost tax collection to CA would be small (but not completely insignificant) the amount of saved human taxpayer time would be huge.

Thanks again.