Should Turbo tax subtract HSA disbursement from medical/dental totals on California state form 540 part II when HSA is not tax deductible? Seems incorrect.

This section on Part II in California Schedule CA is correct.

The California Instructions for Schedule CA state for Part II: "Enter on line 1 through line 16 the same amounts you entered on your federal Schedule A (Form 1040), line 1 through line 16."

And

"HSA distributions – If you received a tax-free HSA distribution for qualified medical expenses, enter the qualified expenses paid that exceed 7.5% of federal AGI on line 4, column C."

TurboTax is following the instructions exactly.

On my test:

1. total of medical expenses: $35,143 (line 1, Schedule A) (does not include expenses paid by HSA)

2. Total of 1099-SA distributions: $79 (line 15, form 8889)

CA Schedule CA

Part II

line 1 - medical and dental  - $35,143

Line 2 - Federal AGI - $71,143

line 3 - 7.5% of line 2 - $5,336

Line 4 (Subtraction - $29,807) (Addition - $79)

So my test exactly matches the CA instructions.

Philosophically, I am thinking that adding the distribution in Column C back to state income takes care of the issue.