Why has my HSA Contribution has been added back to my California income and not treated as deductible?

[rtaitz]

My HSA Contribution increased my taxable income on my Federal return but then reversed once I completed the section. BUT on my California return I got a message that the contributions have been added back to my California income and are not deductible "California doe snot allow you to exclude employer contributions from income". This was not an employer contribution, This was an employee contribution made by me. In my opinion no different than a section 125 contribution. I have seen many of the response about the IRS fefinition. The fact that the IRS, federal, definition does not distinguish between employer and employee should not impact my California return. What do I do?  

[BMcCalpin]

The reason that your HSA contribution is called the "employer contribution" is because your employer's contribution to your HSA and your contribution through payroll deduction are treated the same way - the sum is put in box 12 with a code of W in your W-2, AND the code W amount is removed from Wages in boxes 1, 3, and 5 on your W-2.

So the message "California does not allow you to exclude employer contributions from income" does indeed refer to your contributions made by payroll deductions. It's counter-intuitive terminology, but it's the way the IRS uses it. 

In short, no HSA contribution is deductible in California, no matter where it came from.

If California added back the code W amount, then this is correct. As I recall, if you also made "personal" - that is DIRECT - contributions (which appear on line 25 of the 1040), these would appear somewhere else on the CA return as an adjustment.

The thing to watch for is whether or not your CA state wages on your W-2 already have the HSA contributions added back in by your company. Some companies do this.

This, however, confounds TurboTax because it does the HSA addback automatically and has no way of knowing if the employer included it or not. If your employer includes the HSA contribution in state wages (i.e., state wages are higher than federal wages by the amount of the code W amount), then you will need to back out the TurboTax addback because it would double the impact on state wages.

You would do this by reading the following:

The current TurboTax software assumes that the California state wages reported in box 16 will not have the HSA contributions added back. But some employers do add the HSA contributions back to state wages reported on the W-2.

In this case, you can counteract the TurboTax automatic adjustment by going to the screen entitled "Here's the income that California handles differently" and looking at the bottom at the line "Other Adjustments to Income".

Click on Start and enter "Duplicate HSA add-back" for description and the amount of the HSA contributions as a Subtraction (so it will be subtracted from your state income). 

Keep notes of what you did and why in your tax file, in case the state of California ever writes to you wondering what this "Duplicate HSA add-back" is. 

[TaxRonin]

Be careful of making the adjustment suggested here for HSA add-back . It appears the current version of Turbotax is calculating this correctly by using the Federal AGI starting on 540 line 13. (2024)

[MayaD]

As TaxRonin mentioned it is actually correct for TurboTax to add your HSA contribution. When calculating CA AGI on CA 540 form, you use the Federal AGI which is based on the federal W2 wages  box 1 instead of  CA W2 wages box 16. 

2024 Form 540