HSA earnings taxable in California

Forum|Forum|6 years ago
February 25, 2020
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I've had an HSA in California for several years. This is the first year that Turbo Tax is prompting me to report HSA earnings so that they can be taxed on my CA state return. It's also the first year that I used HSA cash to purchase shares of mutual fund (within my HSA). Thus far, I have only bought shares. I have not sold any. Checking over my Year-end HSA summary from Fidelity, I was surprised to see that I have over $2000 of "Income" from my HSA. This consists of about $100 interest on my HSA cash and $1600 of Long Term Capital Gains distribution, and $100 of Short Term Capital Gains distribution, and $200 of "Dividend". All of the Capital Gains and Dividends were awarded by the mutual fund on Dec. 30 and immediately/automatically reinvested to buy more shares of the same fund. Must I report the whole $2000 so that the state of CA can take about 10% of it?

Best answer by MAK70

Yes, unfortunately, California taxes HSA contributions and the Long Term Capital Gain is considered a contribution so you would have to include the entire $2000.

MAK70Answer

Yes, unfortunately, California taxes HSA contributions and the Long Term Capital Gain is considered a contribution so you would have to include the entire $2000.

ter2b2Author

One Follow up question:

Do my unrealized gains/losses (& fees) factor into the state taxes I should pay?

As I mentioned, I've not yet sold any of the mutual fund shares purchased in my HSA. At the end of 2019, my account shows an $850 loss (unrealized) considering Total Market Value versus Total Cost Basis. Am I taxed on the full $2000 of earnings even though I have $850 of losses on the shares purchased? Also, can I deduct the $37 of fees charged to my account in 2019?

BillM223

California treats an HSA as a regular financial investment vehicle.

That is, you report the HSA just as if it were an after-tax investment account for your federal return.

You would not report unrealized gains or losses, because you haven't incurred them yet. That is, the unrealized loss may disappear (and I hope it does) before you actually sell the stocks or fund shares.

Yes, you can report the $37 in HSA fees as investment fees on your CA return.

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