HSA Taxable Disbribution--Taxable in New York or Connecticut

[Splash232003]

In 2019, I worked exclusively in New York State, but live in Connecticut. I had to withdraw contributions I made to my HSA in 2019 because I had to go on Medicare. All of the money that I withdrew is taxable, and was either deposited in my HSA account directly from my payroll contributions through my New York State employer and from separate contributions made by my New York employer. When I fill out my NY tax forms, do I include this 1099 HSA income as NY state taxable income? Or, instead, do I declare this as Connecticut state income?

[KathrynG3]

Potentially neither New York or Connecticut.

Contributions to HSA accounts that are distributed for medical expenses are not taxed. If your HSA contribution was made directly through your employer, that information is captured on your W-2 in Box 12, Code W. This amount includes employer contributions.

Once you reach age 65, you can use HSA funds to pay for Medicare. These would be considered medical expenses and would be typically tax-free. Were you told your distributions would be taxed?

Click here for steps for the 1099-SA: Where do I enter my 1099-SA?

TurboTax will automatically gather the details from your input and enter Form 8889 to report both the contributions and any distributions for 2019.

[Splash232003]

Thanks Kathryn,

My distribution is taxable because when I signed up for Medicare, the sign-up date is backdated six months. The previous six months I had been contributing to my HSA.  If you are on Medicare, you can not contribute  to an HSA.  So--I had to withdraw the money I put into my HSA for the previous six months -- now considered taxable. I received a 1099 for this from the HSA.

My question is whether I should enter the HSA taxable distribution into my Connecticut or NY tax form. The money was deposited when I worked in New York state. But I'm not sure if this is taxable in NY or CT. Will Turbotax automatically make this decision for me? I fill out a non-resident New York State tax form and a CT tax form.

[BillM223]

The add back goes on your New York return because the original deduction was related to New York source income.

When you have excess contributions, then if the contributions were made through the employer, the excess is added back to Other Income and you do have to pay tax on it. First, since it was related to New York source income, it's income for New York. I haven't tested it, but I am assuming that Other Income on the federal return will pass though to New York, so you probably won't have to do a thing...but I would have take a look to be sure. 

The Other Income may appear on your CT return but I assume you will get a tax credit for the tax paid in NY on the same income, So you shouldn't need to adjust your CT return either, but do look.

[Splash232003]

Bill:

Thanks. Your response makes sense, and follows my thinking on this. However, I was wondering if the states and Turbotax would treat an HSA taxable distribution the same way it would as an early retirement distribution--which I assume would be taxed in one's home state rather than work state where one earned the income for retirement. Or would one be taxed in one's work state?

[BillM223]

No, I think you are correct. When you take any distribution from an IRA (and HSAs have a fair number of similarities to IRAs), you report it in the state where you are living at the time, not in the state where you were 20 years ago when you made the contribution...if you even remembered what state that was.

[Splash232003]

Bill,

Thanks again...so the equivalent situation would be: Somebody works in New York and contributes too much to his/her retirement account, and has to make a taxable withdrawal that year to remove the excess contribution. Because it was a distribution from a retirement account, it would be taxed in the person's home state. Correct? I wonder if TurboTax would automatically enter the 1099 Fed taxable amount as a subtraction in the in the  NY state tax form.

[BillM223]

The idea is that until a contribution is legally accepted as a contribution to an HSA or an IRA, it is tied to a certain year (and month, in the case where you have changed states).

Once the contribution is accepted under the rules, it just becomes part of the giant pot of money in the account. It loses its identity and history - it does not matter what year or state the contribution distributed (assuming that you could isolate it anyway) was made.

If I understand your question about the 1099-SA taxable distribution, the short answer is "no" because TurboTax has no way of knowing to which state it belongs. And I think (without giving it a great deal of thought) that the 1099-SA taxable distribution would be reported on the NY return, and then a credit for the taxes paid in NY would be carried over to CT, so, in effect, CT would not get the tax, even though the income appears to be reported.

[Splash232003]

Thanks again. I agree, logically it is NYS income.