CA 540NR Other income must be entered error because of HSA contribution

[Paul_C148]

My W2 box 16 includes HSA contribution ( box 1 + box 12 Code W).

I am a part-year California resident so I need to submit CA 540 NR form

I get the wanring of Check This Entry Other income must be entered error when I fill the CA state fax

Below is an example: 

In my CA W2:

Box 1: 10000

Box 12 code W(HSA): 2000

Box 16: 12000

540 NR

Part II ' Income Adjustment Schedule

Section A ' Income from Form 1040 or 1040-SR

Col: C: Additions

D:TotalCaliforniaAmounts using CA rules as if you are the resident

E: CaliforniaAmounts

line 1 a Total amount from federal Form(s) W-2, box  in Col E: 12000

line 1 h Other earned income: both Col C and Col D are 2000 but Col E is empty so I get this warning message: Other income must be entered

line 1 z Add line 1a through line: The amount in Col E is the same as line 1 a Col E. 12000

Question1: Why did Turbotax fill line 1 a Col E with Box 16 12000 instead of Box1: 10000 in my w2?

Question2: line 1 z Col E amount is the same as line 1a Col E, which means I can not add any other income in line 1h Col E?

Because If I add 2000 in line 1h Col E, Line1 z Col E (add line 1a through line) should be 12000 + 2000 = 14000. However 1 z Col E is 12000 so I think this it is incorrect?

Can I know how to resolve this issue.

Thank you for your time. 

[Cynthiad66]

Health Savings Account (HSA) contributions are before-tax for federal income taxes and before-tax for state taxes in all states except in California and New Jersey.

Question 1:  California includes HSA contributions into taxable income.  Federal taxes excludes those contributions from taxable income so California has to add them back.

Question 2:  Why would you add $2000.00 back.  It has already been added.

Appears TurboTax has accurately computed total income for the California return.

[Paul_C148]

For question 2, I ask because I get this errorCheck This Entry:CA 540NR Other income must be entered in my CA 540NR, Part II ' Income Adjustment Schedule, Section 1, the line 1 h Col E

When I look into CA 540NR, Part II ' Income Adjustment Schedule, Section 1, the line 1 a Total amount from federal Form(s) W-2, box 1 in Col E is my State Wage (12000) instead of Wages(box1) (10000). 

Will this amount be automatically adjusted after I enter my other income (HSA)?

thanks

[BillM223]

As noted above, CA does not permit the deduction of HSA contributions. In the simple case (i.e., you are a full-year resident of California), TurboTax handles this correctly by adding the HSA contributions back to federal income to make state income (the W16 amount is the same thing, however, this number is not used anywhere on the state return - instead, TurboTax starts with the federal income and then adds and subtracts things to get the state income).

However, if you are filing a part-year CA return, TurboTax can't know when you were living where, much less the dates on which you made your contributions. Therefore, you need to make some manual adjustments to arrive at the correct state income.

First, the HSA contribution that is with code W on your W-2 and any other employer contribution that was not part of the code W amount will appear on the screen "Here's the income that California handles differently" early in the CA interview. This amount appears (unless you change it in the CA interview) on form CA (540NR) on line 1h, column C.

If you made any contributions directly to the HSA custodian (not through your employer), this amount appears on the same form, line 13, column A.

All three of these amounts will end up on the 540NR line 16 to be added back to CA taxable income.

If the W-2 with the code W amount are all CA source wages, then we don't need to adjust the code W amount - it will be added back to CA income as it should be .

If you made any personal (i.e., direct) HSA contributions, take a look at form CA (540NR), line 1h, column C, and see if your direct HSA contribution is there (it should be).

You said, "Check This Entry: CA 540NR Other income must be entered". I assume it actually said, "Check This Entry: CA 540NR Other earned income must be entered"

First you need to determine how much of an HSA addback you have for California (that is, how much you have to add back to CA income of your HSA deduction from federal income).  For example, if you had 10,000 in HSA contributions made through your employer (code W amount in box 12 of your W-2) for the year and you spent exactly 50% of your time in CA, then the add back would be 50% of the 10,000, or 5,000. Thus, Column E would be 5,000.

If this doesn't make sense, come back and tell us:

1. how much your code W amount was on your W-2.

2. How much time you spent in California as opposed to the other state.

[Paul_C148]

Hi Bill,

First of all, thanks for all the details and your time!

I understand I need to adjust my CA income include HSA

1. For example: My HSA is 2000

2. I live in CA for 275 days in 2022 and I had HSA only in CA. So I undersand my other earned income in column E should be 2000

Below is what I really concern about.

In CA tax Income and adjustments section: Tell us about your California income: How much of the $(Total adjusted income) did you earn while living or working in California

I entered 12000 ( CA W2 box 16 State Wage included HSA)

However, this 12000 is show up in line 1a (Total amount from federal Form(s) W-2, box1) in my CA 540NR.

In the end, total CA amount: 12000 (line 1a Total amount from federal Form(s) W-2, box1) + 2000(Other earned income) = 14000 in my CA 540NR. It means that I will be taxed for 4000 adjusted income instead of 2000.

For my understanding, Total amount from federal Form(s) W-2, box1 shoud be 10000 (exclude HSA) which is the amount in my CA W2 box1

If I gave10000 in Tell us about your California income: How much of the$(Total adjusted income) did you earn while living or working in California, 10000 will be magically show up in line 1a (Total amount from federal Form(s) W-2, box1) in my CA 540NR.

I am tring to explain is that TurboTax automatically gives the amount which is I entered in "Tell us about your California income" (CA W2 box 16 State Wage included HSA)  into line 1a (Total amount from federal Form(s) W-2, box1) in my CA 540NR.

To avoid confussion, above line 1a (Total amount from federal Form(s) W-2, box1) is in my CA 540NR. 

thanks

[BillM223]

First, the amount in box 16 on your W-2 - state income, is not actually used on your state return. Oh, yes, it prints on line 12 of the 540NR, it is not used anywhere else.

You referred to CA 540NR, line 1a. You said, "In CA tax Income and adjustments section: Tell us about your California income: How much of the $(Total adjusted income) did you earn while living or working in California I entered 12000 ( CA W2 box 16 State Wage included HSA)" and then, "However, this 12000 is show up in line 1a (Total amount from federal Form(s) W-2, box1) in my CA 540NR.

In the end, total CA amount: 12000 (line 1a Total amount from federal Form(s) W-2, box1) + 2000(Other earned income) = 14000 in my CA 540NR. It means that I will be taxed for 4000 adjusted income instead of 2000."

On my test return, the "12,000" does not show up in line 1a, but rather the original 10,000.

So now we have to figure out what is different between your return and my test.

1. Are you using the Online product or the CD/download product?

2. On your W-2: box 1 is 10,000; box 12 code W is 2,000; box 16 is 12,000

3. On what line on the CA 540NR does the 14,000 appear?

[Paul_C148]

Thanks a lots Bill! 

On my test return, the "12,000" does not show up in line 1a, but rather the original 10,000.

This is what I expected! 

1. Online

2. Yes

3. I could not see the sum 14000 after I entered the other earned amount 2000 in CA 540NR, but I could see 1a is 12000 before I enter 2000. I also could see in the CA tax summary, California taxable income + decduction is much larger than 12000 and I already ignore other income like capital gain. I suspect it will be in line 1z if my 1a is 12000. Is there any way I can check the form before I file it. 

thanks

[BillM223 · Accepted solution]

"Is there any way I can check the form before I file it. "

Unfortunately, if you are using the Online product, you can see only form 1040 and Schedules 1, 2, and 3, but none of the state forms. To see the federal forms, on the far left, click on Tax Tools. Then click on Tools underneath it. Then in the center, click on View Tax Summary, then back to the left, click on Preview My 1040. This will let you see (if you scroll enough) the 1040 and Schedules, 1, 2 and 3.

To check the values on the state forms, you would have to get the CD/download product, and transfer your tax data to it. You can see the state summary for each state, but the summary lacks the fine detail that you are looking for.

Or you could trust me that the state of California works properly, even if it is not obvious (yes, the $12,000 in box 16 is not obvious, since the $12,000 is not actually used on the California return). Instead, the CA return begins with the federal amount, then adds some things (like the HSA contributions) and subtracts some things to arrive at the correct state income. 

Note that since all your HSA contributions took place in California, I am inclined to believe that your CA return will turn out correctly in any case.

[Paul_C148]

thanks again Bill.

One last question, so in this part:

Tell us about your California income: 

Total  adjusted income from W2s

$(Total adjusted income)

How much of the $(Total adjusted income) did you earn while living or working in California

Should I enter 12000 or 10000?

[BillM223]

Enter the $12,000...I did in my test and it looks good...

And this makes sense, because CA thinks that you made the original 10,000 and the additional 2,000 which is exempted on the federal return, but not in CA. 

Make sense?

[notarobot1]

Hi @BillM223 , I am also using 540NR, what if I only lived in CA from12/16 - 12/31/2022 and my HSA was from Ohio employer when I lived in Ohio between 1/1 - 6/20/2022. Btw, do you have a link from CA tax gov link that explicitly addresses question like this?

[RobertB4444]

Because you are a part year CA resident CA will do a weird math thing to figure out what your tax due is.  But they will still add that HSA back in in order to calculate the total income "as if you were a California resident".  After the system has done that then it will calculate the taxable portion due to California and that is where the HSA entry that you make will make a difference.

The FTB doesn't have an article on this HSA difference but here is a piece of legislature that is aiming to change the law and it has a lot of good informatio... about the current law towards the middle of the bill.

@notarobot1 

[notarobot1]

@RobertB4444  Got it. I believe I need to print out and mail the return since spouse is NRA, if you don't mind I am asking that entry would be on line 1h in Part II of Schedule CA 540NR ?

[BillM223]

Since you lived in CA for only two weeks, I would say that the HSA adjustments should not apply to you in CA. Why? Because the HSA contributions were subtracted from non-CA source income (it was OH income instead).

As you see, because TurboTax has to assume that the HSA contributions applied to the entire CA year, then all of the HSA contributions get added back to state income. What you need to do is to back out any HSA contributions that TurboTax has added to state income. 

Please see the following:

Part-year residents of California - Taxed on all income received while a resident and only on income from California sources while a nonresident. (see Part-year resident and Nonresident).

Part-year California residents often find that TurboTax adds back all the HSA contributions, even ones made in another state.

There is no good way for TurboTax to know in which state the contributions were made in, so the taxpayer needs to manually adjust the California state income to remove the HSA contributions that were added back while the taxpayer was not in California.

For example, if the taxpayer lived 6 months in California and 6 months in Texas, and made $3,000 in HSA contributions evenly distributed over the year, then the taxpayer should adjust the California state income by $1,500 to remove one half of the total HSA addback that was done to California state income by TurboTax.

Another example is that a taxpayer who lives in California but moved to Texas on July 1st, but all the HSA contributions were made while in Texas. TurboTax by default adds the entire HSA contribution back to California state income. Because none of the HSA contributions were actually made while the taxpayer was a California resident, the whole HSA contribution for the year needs to be backed out of California income.

***To make the CA adjustment***

Go to State Returns, and navigate to your California return.

In Income and adjustments, proceed through the interview. You may see a screen announcing that HSA contributions are treated differently in California. Just hit Continue.

You will notice on the main page ("Here's the income that California handles differently"), the first line item is (likely to be) "Health Savings Account (HSA) Contributions". Here TurboTax notes that the amount of your HSA contribution has been added back to the California return.

NOTE, despite the Edit button, you can't change this here. 

Scroll down to Miscellaneous Adjustments on this screen. Click Start for Other Adjustments to Income.

Enter in the left column "adjustment for out-of-state HSA contributions". Enter in the middle column (i.e., a subtraction) the dollar amount of HSA contributions made out-of-state (all of them in your case). This will be subtracted from your California state income.

Make a note on your copy of your state tax return (because, of course, you are going to save a copy, right?) that you made this adjustment because TurboTax added back all the HSA contributions (even ones made while a non-resident), and you needed to counteract this. This is in case you ever get a letter from the state asking about this adjustment.

@notarobot1 

[notarobot1]

Upon debating myself with opinions between @BillM223 and @RobertB4444, I'd like to say if the CA tax due

are big, I would agree, probably more intuitively, HSA from out of state shouldn't be added in CA return👍. But if difference by adding back Ohio employer HSA contribution is small, I would add it to 540NR to save me from being audited trouble 😅. 

Appreciate the detailed examples !