Should Turbo tax subtract HSA disbursement from medical/dental totals on California state form 540 part II when HSA is not tax deductible? Seems incorrect.

[juliet_elias]

I would think the full amount of medical/dental should be included on the state form before the 7.5% calculation is done to determine the amount that is allowed to deduct.

[BillM223]

This section on Part II in California Schedule CA is correct.

The California Instructions for Schedule CA state for Part II: "Enter on line 1 through line 16 the same amounts you entered on your federal Schedule A (Form 1040),..."

And

"HSA distributions – If you received a tax-free HSA distribution for qualified medical expenses, ente..."

TurboTax is following the instructions exactly.

On my test:

1. total of medical expenses: $35,143 (line 1, Schedule A) (does not include expenses paid by HSA)

2. Total of 1099-SA distributions: $79 (line 15, form 8889)

CA Schedule CA

Part II

line 1 - medical and dental  - $35,143

Line 2 - Federal AGI - $71,143

line 3 - 7.5% of line 2 - $5,336

Line 4 (Subtraction - $29,807) (Addition - $79)

So my test exactly matches the CA instructions.

Philosophically, I am thinking that adding the distribution in Column C back to state income takes care of the issue.