HSA earnings in New Jersey

[bknight0]

I know that HSA contributions are not deductible on your Nj state return - but question is in regards to earnings.

Are HSA earnings taxable on your NJ state return? If so, can you show me where that documentation exists.

[ChristinaS]

So you took money out of your HSA and didn't use it for medical expenses? Or are you asking about earnings as they grow in the account (and aren't leaving the account)?

[bknight0]

I did take a distribution from my HSA, but it was for a medical expense. I got a 1099-SA to report w/ for that transaction.

What I'm referring to is the dividends, interests, and earnings from buying/selling investments in the account.  Should that be reported as taxable income on my NJ state return?  This post suggests it is: <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2779033-where-do-i-enter-hsa-interest-for-new-jersey-since-it-is-t...>

But I've been unable to find this officially documented online.

[ChristinaS]

Well, for good reason:-)

[ChristinaS]

An HSA is a tax-deferred account, like a 401(k) or an IRA. You don't report ups and downs in tax-deferred accounts, as that is the whole point of having them.

That post has been removed, as it doesn't contain an ounce of truth. Unfortunately, the person asking was wrong and the non tax-expert didn't bother to question it. That happens, unfortunately- we  have too many posts here to micromanage every response.

You get a deduction for medical expenses on your NJ return as you use the account to pay for account expenses. You don't report growth or losses with a tax-deferred account.

[bknight0]

Thanks Christina. That's what I thought, but to add more datapoint: <a rel="nofollow" target="_blank" href="https://www.bogleheads.org/forum/viewtopic.php?t=116282">https://www.bogleheads.org/forum/viewtopic....>

"NJ doesn't recognize HSAs at all, so an HSA is taxed as if it were a bank or brokerage account. You pay tax on any income (unless it is exempt from NJ state tax)."

Is that also incorrect?

To be fair, I have not been able to find any guidance on NJ official tax site on this topic.

[ChristinaS]

I am an NJ-based tax preparer. Neither me nor my fellow NJ colleague that I bounced this off just to make sure I wasn't crazy ever heard of such a thing. So, that on top of no references online makes me confident enough.

[ChristinaS]

Apparently, the programmers of Turbo Tax  and my professional tax software haven't either.

[bknight0]

I'm sold 🙂  Thank you.

[ChristinaS]

You're welcome!

[newsnarker]

Christina, To clarify, do you take the position that dividends, realized gains and losses, and interest in HSA accounts are not reportable on the New Jersey State income tax return?  Are you available for a call?

[ire2020]

I would assume since a bill has been introduced to exclude HSA earnings from taxation that currently those earnings are taxable income for NJ. (Unfortunately for those of us in NJ)

NJ Bill  A105 (with identical Bill S1415) introduced 1/14/20

Extends certain federal income tax advantages of individual health savings accounts to individual taxpayers under the New Jersey gross income tax

These lines are taken from the Statement at the end of the Bill:

This bill allows gross income tax advantages in connection with 

Health Savings Accounts in conformity with the federal income tax

advantages extended to these accounts under recent federal law.

The bill provides a gross income tax deduction for deposits to, and

an exemption for withdrawals from, health savings accounts.

Individuals can use these accounts to cover out-of-pocket medical

care costs under high-deductible medical care plans. The bill also

excludes the earnings in an account from gross income taxation, as

the account earnings are excluded from federal income taxation.