• CA does not recognize HSAs nor the trust that is created for federal tax purposes.
    • This can affect many parts of a return.
  • Form W-2 – contributions made by an employer to a Health Savings Account, shown in box 12 with code W, are not federally taxable, but are taxable by California. The federal income on the Form W-2 (box 1) doesn’t include the amount in box 12, but this amount is taxable on the CA return.
    • TaxSlayer automatically adjusts line 7 of Part I of CA Schedule CA Part I, Section B line 8f.
  • Interest or other income earned in an HSA account is taxable on the CA return.
    • It’s unlikely the taxpayer will bring a document showing how much income was earned within their HSA account, and, in any case, the amount is likely to be insignificant.
      • Do not ask taxpayers for this information if they do not bring it with them.
    • If you do have this information, follow the procedure in the section Manually Entering Income Differences on CA Schedule CA, page 107, to add this as California income.
  • Capital gains or losses within the HSA trust are taxable by California.
    • In TaxSlayer, there is currently no way to make this adjustment. 
    • Note: an adjustment may result in a different capital loss carryover for CA purposes.
  • For HSA distributions in excess of qualified medical expenses, line 16 of Form 8889, TaxSlayer includes the distribution in federal income (Schedule 1 Line 8f, Other Income), but it’s not taxable for CA; a manual adjustment (subtraction) is required.
  • HSA distributions for which there are qualified expenses are not taxable income on either the federal or CA return; no CA income adjustment is needed.
  • HSA contributions made by or on behalf of the taxpayer (Schedule 1 Line 13) reduce taxable income on the federal return, but CA does not recognize such reductions.
    • TaxSlayer automatically makes an adjustment on CA Schedule CA Part I, line 25.
  • Medical expenses reimbursed by the HSA, on line 15 of Form 8889, aren’t deductible on federal Schedule A, but should be added to CA Schedule CA as an additional itemized deduction. A manual adjustment is needed for CA Schedule CA Part II line 4.

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