Where do I find the information to plug into my Health Savings Account Earnings?

[nh12]

It says CA state taxes your Health Savings Account Earnings. I am trying to figure out where I can find those. I moved to CA in Nov. 2020. I had an ongoing HSA account with Fidelity that is invested. I assume this means I need to plug in any earnings from that HSA account for the state of CA (correct me if I am wrong).

I have not used any of the HSA funds.

Lastly, I pulled up my Q4 statement from Fidelity for my HSA account. I see a value listed under "Income Summary" year-to-date. I am guessing that is the amount I have to put in for the earnings? However, it asks me to break it down by interest earned, dividends earned, and net capital gain or loss from HSA. I am not sure where I can find that specific breakdown of information.

[ReneeM7122]

Correct, the value listed under Income Summary on your Fidelity staement is  the amount I have to put in for the earnings

Enter your own HSA contribution as a personal HSA contribution in the 1099-SA, HSA, MSA section of TurboTax.  The contribution will appear on Form 8889 line 2 and the deduction will appear on Form 1040 line 25.

(Your HSA contribution does not reduce you net profit from self-employment, so it does not affect the amount of self-employment taxes you must pay.)

Here is a TurboTax article about HSAs.

[dmd3521]

I contacted Fidelity regarding reporting/taxation of earnings on Health Savings Accounts to the State of California, and they have never heard of this!  Under my income summary for 2023, I show $643.57.  is this what I report?  And do I report it as interest, dividends, or capital gains?  I have never pulled money from this account - I'm letting it grow for use in my old age.  So ay capital gains are unrealized at this point.

[SusanY1]

California has pending legislation to update this, so please disregard my earlier message that this had changed.

The law has not yet changed and California still doesn't conform to the rules deferring gain on HSAs.  

@dmd3521

[Edited 3/1/24 12:40 PM PDT] 

[dmd3521]

Thanks.  If earnings on HSAs are no longer required to be reported to the State of California Franchise Tax Board (due to legislation passed on 2022), why is TurboTax still asking for this information?  

[dmd3521]

Since I received conflicting information from TurboTax and an outside tax accountant regarding the California taxation of earnings in a Health Savings Account, I initiated an online chat with the California Franchise Tax Board.  They do still tax earnings (dividends and interest) on a HSA.  They do not tax unrealized gains.  I'm not sure why you thought this taxation was cancelled by 2022 legislation in California, but it was not.  Again, California does NOT conform to the Feds when it comes to the tax treatment of earnings in a HSA. Interest and dividends are taxed.  Unrealized gains are not.  

[DawnC]

The question in TurboTax is asking about distributed earnings.   If you did not take any distributions from your HSA, you have nothing to report.   You would have received a 1099-SA had you taken a distribution during 2023 - and the necessary information for tax reporting would be on that form.  

[dmd3521]

That is not what the California FTB told me.  I explained to them that I have NEVER taken a distribution from my HSA.  They said the interest and dividends are still taxable but any GAINS are not taxable unless I take a distribution.

[BillM223]

Gains or losses inside an HSA are reportable on Schedule CA (540) on line 7 - see Line 7 in Section A in the instructions for Schedule CA (540). This should result in the gains being reported as California ordinary income (since all capital gains - long and short - are taxed as ordinary income).

There is no mention of whether or not they were part of distributions. 

[dmd3521]

That is incorrect.  The discussion I had with the CA Franchise Tax Board yesterday resulted in the following information:

1.  Income earned in the form of dividends and interest are taxed as ordinary income, regardless of whether a distribution was taken or not;

2.  Capital gains are not taxed unless there was a distribution.

[amitmd4u]

@dmd3521, if there were distributions in HSA, how to identify the capital gains?
This is unbelievable that HSA providers cant provide form to import HSA earnings and capital gains easy and quick.

[BillM223]

@amitmd4u 

Only 2 state (CA and NJ) don't conform to the federal government's treatment of HSAs. Thus, for market reasons, HSA custodians don't have a lot of motivation to cater to taxpayers in these states. Seems silly, since these are two populous and wealthy states, but I am sure that is the reason...

I encourage users to just go straight to a supervisor when asking for information about their HSA if they live in NJ or CA. The first line people at the HSA custodian seem unlikely to even know that such a different treatment even exists...

[CI Guy]

This article (January 2025) indicates CA taxes HSA growth as well as dividends and interest. Reason #237 why I need to leave CA. 

The example is poor because he uses interest as an example of growth. But other articles I've read say earnings are taxed (https://thefinancebuff.com/california-new-jersey-hsa-tax-return.html ). So do we need to subtract the HSA starting balance on 1/1 from the ending balance on 12/31 and report that as "earnings" to CA? 

Unlike federal law, which allows tax-free growth of HSAs, California taxes all earnings within these accounts, including interest, dividends, and capital gains. For example, if an HSA generates $500 in interest over a year, this amount must be reported as taxable income on the California state return.

Account holders must track HSA earnings to ensure accurate reporting and avoid penalties or interest for underreporting. This taxation can significantly impact those with large account balances or high-performing investments, underscoring the importance of diligent record-keeping.

https://accountinginsights.org/is-hsa-growth-taxable-in-california-key-tax-rules-to-know/

[BillM223]

What CI Guy says is true and confirms what we said earlier. You must treat the HSA in California as a regular investment account, with the exception that all capital gains, both long term and short term, as taxed as ordinary income.

This because the California Instructions state "California taxes long and short term capital gains as regular income. No special rate for long term ...."