Reporting HSA income to California

[krm57]

For CA, unlike for the IRS, I have to report HSA income. My HSA has 2 positions: cash and a mutual fund. The cash portion earns interest which I would report (except it's less than a $1). The mutual fund has 3 types of income: dividends, long term gains and short term gain. All of these are reinvested back into the mutual fund. The gains are not "realized", as all of my HSA activity (contributions and distributions) have been in the cash portion. Does CA consider all of re-invested income taxable, or just the dividends? 

My Fidelity statement says all income is tax-free, but I believe that is true for the IRS.

krm57

[BillM223]

Just like a regular mutual fund on your 1040 return, all earnings in a mutual fund (no matter what type) are considered taxable for California purposes. even if reinvested within the HSA

So you will need to report all of those on your California return.

Yes, most HSA custodians are seemingly unaware that two populous states (CA and NJ) require that you report earnings from your HSA. When people have questions about how they would even know what their earnings are - since they are not normally reported on your statements - then I ask them to ask for a customer service rep who knows about those two states.

Yes, Fidelity, like all the other HSA custodians, assumes that all HSAs are nontaxable.

[krm57]

Thanks for the response.

I'd like you to respond specifically to part of my question: "The gains are not "realized",... " and do I need to report the gains as income to CA? I ask because I have stock, and when it goes up in price I don't have to report the gain because I didn't sell the stock. I'm not an expert (have patience with me): is this different for mutual funds, and I have to report capital gains even when I didn't sell any of the mutual fund.

Bottom line: do I report capital gains for a HSA mutual fund  to CA when I haven't sold any of the fund. 

I think the answer is yes. Thanks.

[DaveF1006]

Yes, you are correct. California taxes HSA contributions. Please read this Turbo Tax post for clarification. Even if the gains are not realized, the long term capital gain, dividends, interest etc. are considered contributions and the entire amount is taxable to the State of California.