HSA earnings taxable in California

[BillM223]

@TaxPayer888

"Does this mean HSA interest, div, cap gains count towards the annual contribution Federal limit for this year? "

No. Any earnings in the HSA do NOT count as contributions, so don't worry about that.

@bill_sg

"Can you confirm that Earnings on amounts in HSAs are not taxable for California?"

This is not true...well, the bill was submitted, but it never passed. I looked into this a week or two ago and even called the hotline for Enrolled Agents at the CA FTB - California still taxes HSA earnings.

Here is my response from a week ago:

"I cannot comment on what other tax software firms do, but please know that the state of California still does not conform to federal law when it comes to HSAs. In English, this means that HSA contributions are not deductible from state income - which I confirmed with the California Franchise Tax Board a few minutes ago on their hotline for credentialed tax professionals.

You can see that there is no reference to HSAs or Health Savings Accounts in the current California booklet, as there would be if the law in California had actually changed.

I looked up AB 2348, and it was clear from the legislative history that it actually never passed. The same is true of a similar bill that was introduced this year - it hasn't passed yet, either.

So please feel confident that TurboTax is handling your return correctly."

@marychris

Your CPA is mistaken. Is he/she not from California? He/she can contact the CA FTB just as I did, and he/she will get the same answer: "California is not in conformance with federal law on the subject of HSAs".

[marychris]

He's in California, yes and I figured that wasn't correct and why I posted. So to clarify, I do need to report losses and gains in the HSA on my California taxes? If so, what do I need to provide to him so he does it correctly? My HSA custodian is Fidelity.

[BillM223]

In the California interview (see below), TurboTax asks you for "interest, dividends, and capital gains" from your HSA account.

It is possible (even likely) that the regular statements from Fidelity do not report this, since this is not needed in 48 of the 50 states.

So unless you find an HSA statement that clearly marks such things, I would call Fidelity and ask to speak to a customer service rep who is familiar with how HSAs get reported in California and New Jersey. There is bound to be someone there who is familiar with the situation, given how many people live in those two states.

***Where to enter***

In California, on the screen with the heading "Here's the income that California handles differently", scroll down to the subheading "Investments", and click on Start for Health Savings Accounts (HSA) earnings. In the screen that follows, enter your interest, dividends, and capital gains in your HSA.

[marychris]

Thank you for the thorough response. That's what I get for going with a CPA instead of TurboTax for this tax season. I appreciate the help.

[TaxPayer888]

FWIW...I did speak to a Fidelity rep and they confirmed they do not report HSA activity to the Federal Gov, and that we are responsible for any State reporting.  I was told that CA considers HSA accounts just like any other investment account.  Fidelity does post summary reports with the data you need.  Good luck!

[BillM223]

@TaxPayer888

Thanks for confirming that Fidelity does supply the needed data if you work at it. After all, there are nearly 40 million people in CA, so you would think that Fidelity and other HSA custodians would accommodate them...not to mention the taxpayers in New Jersey who have HSAs, who face the same issue.

[JimBobKennedy]

That text is from a bill under consideration, not from a law already in effect.

[JimBobKennedy]

I'm confused. On one hand  you're saying no contribution or distribution means no need to report anything.

But others are saying California treats the HSA as a regular investment account, and for such an account there can be interest and dividends even when there no deposits and no distributions.

Can you explain how to make sense of this?

[DanielV01]

@JimBobKennedy Since HSA accounts at the Federal level (and also for most states, but not California), are considered to be tax-deferred (and tax-free accounts when spent within the rules), it is not normally necessary for a brokerage firm who invests on behalf of the HSA to report anything for tax purposes, because there's nothing to report (it's all tax-deferred activity).  However, California is different, because they do not allow a deduction for HSA's.  Therefore, growth in an HSA would be similar to growth in a bank account or a mutual fund:  it's taxable income on after-tax funds.  But there is no form to track it, because the broker does not need to report this to the IRS.  You will need to do so manually, and your HSA statements should have this.  But there is no 1099-INT or 1099-DIV form, for example, that they will provide.

[MHWiz]

In fidelity statements for HSA I see two things related to capital gains:

1) Long/Short-Term Cap Gains received from ETFs/Mutual fonds

2) Realized Gain/Loss from Sales.

In order to report it properly on tax return, should I add these numbers and enter it into Net capital gain or loss from HSA in the mentioned state return section?

[Cynthiad66]

Yes.  Since California taxes HSA contributions you would need to enter the amounts on the California return.

[ngochanle2210]

Hi Cynthia, 

Can you please help with a question? I only bought but did not sell any thing in 2020 so I only have unrealized gain. Does it mean I should put 0 under "Net capital gain or loss from HSA" in TurboTax? Thank you!

[DawnC]

Yes, you only need to report interest, dividends and realized capital gains and losses - and only in CA and NJ.    All other states treat HSA accounts as tax-deferred accounts.  

In California, on the screen with the heading "Here's the income that California handles differently", scroll down to the subheading "Investments", and click on Start for Health Savings Accounts (HSA) earnings. In the screen that follows, enter your interest, dividends, and capital gains in your HSA.

You would not report unrealized gains or losses, because you haven't incurred them yet.   That is, the unrealized gain or loss may disappear before you actually sell the stocks or fund shares.   @ngochanle2210

[jcha21]

Hi, I also have a question. My employer changed HSA custodians so there was a trustee to trustee transfer of my HSA which I know does not incur tax consequence since I dont need to report the transfer amount as a withdrawal from my HSA but my investments had to be liquidated in order for the transfer to be completed. Does this liquidation mean I have to report the amount as a capital gain on my California tax return? Thanks!

[vord0701]

For me this is an incredible amount of work.  BenefitWallet does not do annual statements.  I need to tally information month by month.  I don't understand if/how California can reconcile any data passed to state with the information I will need to input.  Are we sure about this new law?