Can I claim a Health Savings Account deduction in Illinois even though I'm a non resident?

[taufmannw]

turbo tax includes a health savings account deduction for the state of Illinois in which I am not a resident, but required to file.

[BMcCalpin · Accepted solution]

Are you talking about the line 24 entry for health savings account deduction on Schedule NR? Is your question whether or not to put that amount in the Illinois column (I assume that it carried from the federal return to the federal column)?

Based on what I read in the Schedule NR instructions, my answer would be "yes". Please read on.

In reading the instructions for the Schedule NR, it appears that for line 24, you are to copy the amount in Column A (federal) over to Column B.

You will note that many lines have instructions on how to calculate the amount to allocate to Illinois - notice in the instructions the "Self-employment decimal for Lines 26, 27, and 28" immediately after line 24. 

But for other lines - like Line 30 Alimony - the instructions just say, "Enter the amount of alimony you paid during the tax year as shown in Column A. "

Since the instructions from line 24 state baldly "Enter the amount of health savings account deduction you claimed this year as shown in Column A" with no discussion of prorating, I take that to mean, "yes, you can claim the deduction".

[airwolfe]

I have same question, but I am an Illinois Resident and have business income from Arizona.  Turbotax State AZ did not take the HSA deduction so there was a tax due, but Turbotax State IL assumed I did take the HSA deduction  in AZ and would not allow credit for the taxes paid in AZ.

[MarilynG1]

@airwolfe If your HSA contribution is shown in Box 12 with a Code W, this amount was not included in your Wages in your Federal Return.

Since most states start their calculations with your Adjusted Gross Income from your Federal return, your HSA deduction would already be included in that amount in both Arizona and Illinois, so you would not take another state deduction for your contribution.

However, if you made your own HSA Contributions separate from your Employer, you can take the deduction in your Resident State of Illinois.

Click this link for more info on HSA Deduction for Illinois. 

Since you are filing a Non-Resident return for Arizona, this link has info on How to File a Non-Resident State Return.

Illinois should give you a deduction for tax you paid to Arizona on your Business Income on Schedule CR, if this applies. 

Prepare your non-resident return Arizona return first, so you know what your tax liability is there, then your Resident Illinois return.

This link has info on Illinois Credit for Tax Paid to Other State. 

[airwolfe]

Appreciate your reply - I should have mentioned that it the contribution was not from employer, rather we made the contribution individually.  The reason I had to ask the question is when I  used Turbotax state for IL, it automatically put in the $8100 deduction on the IL CR form line 20 (Health savings account deduction) column B (non Illinois income).  I had to do right click manual override to make it to zero, so that Illinois return would allow the credit paid for tax paid in Arizona (which I  owe if not taking the $8100 deduction on that return).  So it seems to me to be a flaw in Turbotax State IL program.

Should I report that flaw to Turbotax development team?

[BillM223]

So help me understand. You are filing a resident return for Illinois and a nonresident return for Arizona, right?

Did you enter the Arizona first? It is normal (not universal though) to enter the nonresident state first so that the state tax can be calculated and brought back to the resident state as a tax credit (line 15 on IL-1040).

I see in my test that 7,100 appears in both columns A and B on line 20 of Schedule CR.

So I go to look at the instructions for line 20 for Schedule CR, and I see

"Line 20: Health savings account deduction Enter the amount from Column A."

While other lines here ask you to enter the prorated amount of the expenses from out of state, for line 20, you are just told enter the A column into B.

Since the HSA deduction is clearly an Illinois deduction (you contributed the money to the HSA while a resident of Illinois), for whatever reason, the Illinois instructions wants you to put the same amount in column B.

My only guess is that this will come out in the wash so it won't affect the final result.

Lacking any reason to disregard the state's instructions, I would say, don't worry about it.

[airwolfe]

Yes, I am filing a resident return for Illinois and a nonresident return for Arizona.

This is a first time filing for Arizona for me;  I had done Illinois first, as one state is included in Turbotax Deluxe and initially was going to do the Arizona return at the AZ Dept of Rev online site, but then decided it might be easier to buy the Turbotax  Arizona state return.  But as described, with Turbotax  Illinois  automatically inserting the HSA deduction in CR form, line 20, column B, and the HSA deduction was larger than the income derived in AZ, Illinois assumes I paid no tax to AZ, and denies the credit for the AZ tax I do have to pay, as it seems I should not take the HSA deduction in AZ also.  So I wouldn't say it comes out in the wash.  I had to manually override the CR Line 20 Column B to zero in order to properly get the tax credit in IL for the taxes paid in AZ.

[BillM223]

So you have decided to ignore the clear instruction in the Illinois instructions to put the value in line 20, column A into line 20, Column B?

Just remember that if you do an override, you will void the Tax Calculation Accuracy Guarantee.

[airwolfe]

Well the Illinois instructions are at odds with the Arizona instructions  - if I cannot take the HSA deduction in both states, and should take it in my state of residence (IL) then the IL CR should not also have the HSA deduction in the Non-Illinois Income column (B).   Otherwise I am being taxed twice on this income, and that is not legal.

As I mentioned in earlier post, I think this is a flaw within Turbotax state versions, and I am willing to talk with a Turbotax employee regarding this discrepancy.

[airwolfe]

One more followup - I spoke with representative at Illinois Dept of Revenue about the IL CR line 20 col B - if I manually override to 0, instead of using the same amt as column A, they will flag it and send a correction notice.  We spent an hour on the phone covering why I think the AZ based income is being double taxed, if the HSA deduction is not on the AZ state tax form, but IL assumes that it is.  Since the AZ instructions for Federal Adjustments are more vague than Illinois' instructions, I have come to the conclusion it is best to show the Federal Adjustment for HSA on the AZ tax form, yielding the result of no payment owed to AZ, aligning with IL interpretation.  Thank you for the call out on the manual override; it's not a Turbotax discrepancy, rather a difference in state instructions.  I may end up getting a correction notice in AZ, so time will tell.

[BillM223]

"Otherwise I am being taxed twice on this income, and that is not legal."

It's true that in October 2014, the US Supreme Court invalidated all state tax schemes that might lead to double taxation of out-of-state income - see this US Supreme Court link.

The problem is that in terms of local taxation, states are reasonably independent - who is going to make which state change their laws? It would take an act of the Supreme Court to do so, and who has the time and money to do that (often)?

So while in theory double taxation by states is not legal, the cure is a problem and not easy to attain. TurboTax has to abide by the states' laws and leave it to the legislatures and the courts to bring tax codes in alignment.

[shcliff]

I also have this issue, but with the State of NC.  I am a resident of IL and have investment property that is wholly located in NC.  The partnership form in NC allows the Partnership to pay the tax on behalf of the non-resident partners, therefore I have no opportunity to allocate the HSA deduction to my NC income as the AZ non-resident individual has proposed.  If my non-IL taxes were higher, I would be doing the override and fighting it with IL.    

[DaveF1006]

Yes, you can allocate your HSA contributions in your Arizona non-resident return. In fact, Arizona will allow you to allocate your income and expenses as you continue through your Arizona non-resident return. 

To allocate your HSA contribution in the Arizona return, you will allocate in the adjustment screen as you proceed through the state interview. Here is what the screen looks like in your Arizona return in Turbo Tax. 

[airwolfe]

That's what I ended up doing - thanks for the affirmation!