HSA Contribution - Allocation to State

[Gary24]

Later in March I will be making a contribution to my HSA for the 2019 tax year. I lived in both NY and IL during 2019. What options do I have to allocate the contribution to state? Will it matter for state tax purposes?  I will need to file as a part-year resident in both NY and IL.

[BillM223]

What type of HSA contribution is this? One through your employer (code W in box 12 on your W-2? Or a direct contribution to the HSA not through the employer? I assume the latter.

Where are you living now? Use that state as the locus of your direct HSA contribution.

If the contribution were tied directly to income (as the Code W amount is), then you would allocate the contributions to whatever state the income were sourced from.

But a stand-alone "direct" HSA contribution is not directly tied to any state, so allocate it to the state where you were (are) living as you make the contribution.

[Gary24]

Bill, thank you.

The contribution will not be made through employee payroll deduction and will not be on any W-2. I will be writing a check to the HSA account in a week or so. I am currently living in Illinois. The question came because 'allocating' the payment to New York would reduce my overall tax liability a bit (I think). I am not confident it is OK to allocate the payment pro-rata by time or completely to NY (the latter by noting that the payment would come out of income earned while in NY earlier during 2019). Do I have flexibility or am I obliged to 'allocate' to IL because that is where I am living when I make the payment?

Thanks for your advice, I appreciate you taking the time.

[BillM223]

First, I am a little surprised that Illinois tax is more than NY tax, but I guess at the lowest levels it is - Illinois is 4.95% while NY is 4%, 4.5%, 5.25%, 5.9%, 6.21%, 6.49%, 6.85% and 8.82%.

No matter, this is one of those undefined areas. When the HSA contribution is tied to state-source income, the answer is easy. When the contribution is not directly tied to state-source income, then there are generally no specific instructions. Here I would fall back to where you were living at the time of the contribution.

You are paying the contribution out of an amorphous bucket of money. Who is to say if the contribution dollars came from NY income or IL income?

If you choose to take the stand - lacking any clear instructions from either state - that you want to allocate the contribution between the states, just make sure that you document what you did and why. 

And if one state ever questions your choice and assesses additional tax on you, well, you'll be able to file an amended return for the other state to get the money back (more or less).