California taxes on HSA dividends, interest or cap gains?

[explanade]

OK, I contributed and bought VG fund shares in my HSA account but never redeemed.

So is there anything to report?

Clearly I'm getting dividends and more shares are being purchased (DRIP) but HSA Administrators isn't sending me any kind of tax document.

I Googled and found this Bogleheads thread where someone claims HSA fund administrators generally are not reporting this info. to the states. Since there's no federal requirement, they must not bother with particular states which seek to tax any HSA gains?

https://www.bogleheads.org/forum/viewtopic.php?t=203443

So CA can't know but yet when I'm getting a federal adjustment for the annual contribution, it gets carried over in TT to the CA return.

What do we do, manually add up transactions for dividends and self-report?

Do we get to at least deduct the administrator fees?

 

[ownyourfuture]

I am new to HSA's so I'm not very knowledgeable regarding the rules & regulations, but I'm reasonably sure that HSA's are basically the same as IRA's

That is, unless you're over a certain age, they should continue to grow tax-deferred.

Hopefully someone who's more knowledgeable will chime in.

 

[rodi]

I could be wrong on this but here's what I think happens in CA. (Or at least how turbo tax treats it.

In CA, HSA contributions are taxable by the state. (Tax free by the feds). The withdrawals are like withdrawals from ROTHs, presuming they're used for qualified expenses... So it's post tax money in - and tax free withdrawals if used for medical expenses.

Similar to 529's also.

The growth is tax free if you use the money for qualified expenses.

A quick google suggests I got this right... but if I don't please correct me.

 

[explanade]

Well HSA Administrators shows I got $300 in dividends and cap gains distributions in 2016.

That increases my CA taxes by like $25-30, though HSA Administrators also charged me $62-63 in fees.

Looks like CA doesn't care about those fees when I enter them as investment expenses, in the sense that it doesn't allow the deduction or at least it doesn't affect my tax bill to the FTB.

 

[rodi]

Holy crud... just did some googling and confirmed that I was very wrong.

I have filed erroneously for 2 years now. Yikes. Off to go look into amending my CA returns.

 

[RobbieB]

Good idea. The CA FTB makes the IRS look like nice guys...

 

[cathy63]

Well HSA Administrators shows I got $300 in dividends and cap gains distributions in 2016.

That increases my CA taxes by like $25-30, though HSA Administrators also charged me $62-63 in fees.

Looks like CA doesn't care about those fees when I enter them as investment expenses, in the sense that it doesn't allow the deduction or at least it doesn't affect my tax bill to the FTB.

I don't see anywhere on my CA return that investment expenses get entered separately, so I think they're just carrying over from the Fed return's deductions. They are part of the misc deduction total (Sch A line 24) that has to exceed 2% of your income in order to be useful. They are also used in the Form 8960 calcs, which you only file if your MAGI is over something like $250K.

Are you itemizing on your Fed return, and do you have a number greater than 0 on Sched A line 27? If both answers are yes, then I think you should see a small effect on your CA tax when you enter the investment expenses.

 

[explanade]

Thing is, you don't even enter investment expenses for HSA on the Federal because Federal doesn't tax HSAs unless you withdraw for non medical.

So the first chance you get to enter HSA expenses is in the CA adjustments section.

 

[cathy63]

Thing is, you don't even enter investment expenses for HSA on the Federal because Federal doesn't tax HSAs unless you withdraw for non medical.

So the first chance you get to enter HSA expenses is in the CA adjustments section.

Oh I see. I don't have an HSA myself, so normally I don't account for this. However, I stuck in some numbers to play with. The investment income expense entered in CA adjustments only affects your CA tax if, when added to your federal misc deductions, it exceeds 2% of your federal AGI.

If you go into forms mode in TTax and look at the Schedule CA Misc Deductions sheet, you should see the expense amount you enter on Part II, line 3.

 

[explanade]

Yeah it has to meet a rather high threshold.

In my case, the expenses they deducted out of my account were 20% of the cap gains and distributions they taxed me on.

Seems like I should be able to offset ...

Though if I was able to offset, it probably would have been $6-8 less in taxes.

 

[kaneohe]

Sounds like you have the right idea on this: you need a split brain to do this.
Treat federally as HSA........take deduction for contributions, don't declare earnings. Treat as a normal taxable account for CA..........can not take deduction for contributions so must add back to Fed AGI as CA adjustment;
also must add earnings back in a similar fashion to CA return.

Another reason to track earnings (forever)........they add to CA basis so when you take withdrawals, the gains will be taxable adjustment on CA return but will be smaller due to increased basis. Another wrinkle......doubt that HSA custodians will track basis/gains as is typical in a normal taxable account....so can you sell specific shares if custodian won't give you an acknowledgement letter confirming the specific shares?

 

[explanade]

Doubtful it's that granular.

 

[kaneohe]

Wonder how one would handle withdrawals if nobody is worrying about the granules? Custodian will report withdrawals to Feds so CA will know about them tpp. Average basis tracking is even worse than specific shares. I suppose one could use any ole number for basis but if unable to prove, CA could use 0, as Feds do, for basis (for CGs).

 

[Done]

I've been treating the HSA as kaneohe described. California does not recognize the HSA as a special account. This is simply a taxable account in CA so you have to make CA adjustments for anything that received special federal treatment. I save my year-end HSA statement each year since this info not reported on a 1099. TurboTax automatically deducts the HSA contribution on Schedule CA line 25 but you have to enter HSA interest, dividends and capital gain/loss in the interview.

[Edit]
TurboTax now asks for these values for California adjustments. It's up to you to track basis and figure the values.

One way to minimize the headache is to keep only CA-tax-free investments or cash in the HSA.

 

[explanade]

So when you withdraw, you pay any cap gains. However, HSA accounts don't necessarily track cost basis ...

 

[Done]

Yes, the account custodian won't track basis or calculate capital gains/losses so you have to do this manually. This is true even if you sell an HSA investment and don't withdraw it. Since it's just a taxable account in California, a sale is a taxable event but a withdrawal is just a transfer between accounts.

[Edit]
TurboTax made it easier to enter HSA California adjustments this year. The interview now prompts to enter interest, dividends and capital gain/loss.

"If your HSA earned income from interest, dividends or capital gains, that income is not taxed by the federal government. However, California considers it taxable income."

 

[ownyourfuture]

After reading this thread, I wondered if my state taxed HSA contributions/dividends, cap. gains, etc

If anyone else is wondering, I found the following here.
State Tax Information - OptumHealthFinancial.com

*Consult your financial advisor or state department of revenue for more info*

Eligible HSA contributions are not taxed by these states

Arizona
Arkansas
Colorado
Connecticut
Delaware

Georgia
Hawaii
Idaho
Illinois
Indiana

Iowa
Kansas
Kentucky
Louisiana
Maine

Maryland
Massachusetts
Michigan
Minnesota
Mississippi

Missouri
Montana
Nebraska
New Mexico
New York

North Carolina
North Dakota
Ohio
Oklahoma
Oregon

Pennsylvania
Rhode Island
South Carolina
Utah
Virginia

Vermont
West Virginia
Wisconsin



Eligible HSA contributions are taxed by these states.

Alabama
California
New Jersey



States without state income taxes – eligible HSA contributions are not taxed

Alaska
Florida
New Hampshire
Nevada
South Dakota

Tennessee
Texas
Washington
Wyoming

HSA earnings (but not eligible contributions) are taxed by these states

New Hampshire
Tennessee

 

[Done]

[Edit]
TurboTax made it easier to enter HSA California adjustments this year. I updated my post above.

 

[Just_Steve]

Someone has to make up for prop 13