• 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 (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 box 12 amount, but this amount is taxable by CA.
    • 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 is taxable on the CA return.
    • It’s unlikely the taxpayer will bring a document showing how much income was earned within their HSA, 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 103, 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 adjust this. 
    • Note: an adjustment may result in a different capital loss carryover for CA purposes.
  • For HSA distributions in excess of qualified medical expenses, Form 8889 line 16, TaxSlayer includes the distribution in federal income (Schedule 1 Line 8f, Other Income), but it’s not taxable for CA; manual 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 adjusts 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. Manual adjustment is needed for CA Schedule CA Part II line 4.

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