Tax Treatment of HSA in California

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Topic Author
Joel
Posts: 223
Joined: Tue Apr 30, 2013 12:27 am

Tax Treatment of HSA in California

Post by Joel »

I live in California, and I currently have an HSA account.

My contributions reduce my federal taxable income, but the contributions are added back to my california taxable income, and that income is taxed in california.

Additionally, interest earned and other earnings are subject to taxation in California.

Interest earned is easy to calculate as it shows up on the monthly statement.

What do those of you who have an investment account in their California HSA?

How are gains/losses tracked?

Are gains/losses only realized when they are sold? (normal treatment of investments in stocks)

Or, are gains/losses somehow realized at the end of the year?

Also, my understanding is that U.S. Treasury Bonds (and California municipal bonds) are not taxable in California, therefore, it would be make sense to invest in those funds in my HSA account, and then not have to pay takes on any dividends or capital gains on those accounts. Am I understanding that correctly?

I currently have approximately $30 in losses from my original investment in a total stock market index fund, before I changed my investment to a U.S Treasury Bond index fund. I want to make sure I will at least be able to capture that $30 in losses on my california taxable income. Otherwise, I should invest in stocks until I at least recoup the $30 in losses.

Also, are the maintenance fees paid for the HSA account considered a reduction in earnings?

This is significant as my california marginal tax rate is 8%!
My investment policy statement: https://www.bogleheads.org/forum/viewtopic.php?t=190093
ajcp
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Joined: Fri Dec 13, 2013 5:44 pm

Re: Tax Treatment of HSA in California

Post by ajcp »

It's just like any regular taxable account. Dividends are taxed in that year, gains are taxed when they are realized, etc. Assuming California allows capital losses, yes you could deduct it in your HSA.
Topic Author
Joel
Posts: 223
Joined: Tue Apr 30, 2013 12:27 am

Re: Tax Treatment of HSA in California

Post by Joel »

I understand that they are handed similar to a brokerage account, however, there's a few specific points that I am not completely clear on as it relates to California.

Are the maintenance fees somehow tax deductible in California?

Are capital losses on the HSA account deductible in California?

Are U.S. Treasury Bonds dividends tax-free in California?

Are capital gains with regards to U.S. Treasury Bonds tax-free in California?
My investment policy statement: https://www.bogleheads.org/forum/viewtopic.php?t=190093
Topic Author
Joel
Posts: 223
Joined: Tue Apr 30, 2013 12:27 am

Re: Tax Treatment of HSA in California

Post by Joel »

Here's what I can summarize:

1. You must add HSA contributions to your california taxable income.
2. You must add HSA interest to your california taxable income.
3. You must add HSA dividends to your california taxable income.
4. You must add realized capital gains/ to your california taxable income (and subtract losses). Therefore, you must track your cost basis and time period for all HSA investments.
5. Interest/dividends received from U.S. Treasury Bonds are tax-exempt in california. Therefore, it's best to hold U.S. Treasury bonds in your HSA account.
6. You must add realized capital gains on U.S. Treasury bonds to your california taxable income (and subtract losses).
7. HSA maintenance fees are not tax-deductible in california.

Can anyone confirm my findings? Or state otherwise?
My investment policy statement: https://www.bogleheads.org/forum/viewtopic.php?t=190093
ajcp
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Re: Tax Treatment of HSA in California

Post by ajcp »

Joel wrote:I understand that they are handed similar to a brokerage account, however, there's a few specific points that I am not completely clear on as it relates to California.

Are the maintenance fees somehow tax deductible in California?

Are capital losses on the HSA account deductible in California?

Are U.S. Treasury Bonds dividends tax-free in California?

Are capital gains with regards to U.S. Treasury Bonds tax-free in California?
No idea.

I do not know if California allows capital losses, but assuming they do, yes the capital loss is deductible.

Yes.

This seems to vary state by state. This thread seems to indicate yes, but I am not an expert in either California taxes or taxes on treasuries, so I do not say that with certainty.

1-6 matches my understanding, again-no idea on 7, but that would be my guess.
Topic Author
Joel
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Joined: Tue Apr 30, 2013 12:27 am

Re: Tax Treatment of HSA in California

Post by Joel »

Yea, I was hoping for someone who was actually from California and was familiar with it to respond.
My investment policy statement: https://www.bogleheads.org/forum/viewtopic.php?t=190093
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grabiner
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Re: Tax Treatment of HSA in California

Post by grabiner »

Joel wrote:I understand that they are handed similar to a brokerage account, however, there's a few specific points that I am not completely clear on as it relates to California.

Are the maintenance fees somehow tax deductible in California?

Are capital losses on the HSA account deductible in California?

Are U.S. Treasury Bonds dividends tax-free in California?

Are capital gains with regards to U.S. Treasury Bonds tax-free in California?
As far as CA (and likewise AL and NJ) are concerned, your HSA is just another brokerage or bank account, so you adjust your CA/AL/NJ taxes by reporting the HSA the same way. Employer contributions to the HSA are added to your salary, since they represent a payment from your employer to your bank account. Treasury bonds (and bond funds meeting the state requirements) are exempt from state tax. Capital gains on Treasury bonds are taxable if they would be otherwise taxable by the state; NJ exempts these gains, while CA taxes them, and I believe AL also taxes them. Capital losses are deductible if gains on the same security would be taxable.

I am not sure how maintenance fees are handled. They are deductible from state tax if they would have been deductible from federal tax on an ordinary account, but I'm not sure of the rules here, and it may also depend on how the fees are reported.
Wiki David Grabiner
mikep
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Re: Tax Treatment of HSA in California

Post by mikep »

Investment account fees are part of miscellaneous deductions subjected to 2% of AGI, likely if you itemize on CA return it would go there. Not sure if you would use federal or state AGI though.
sreynard
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Joined: Thu May 02, 2013 8:11 pm

Re: Tax Treatment of HSA in California

Post by sreynard »

I treat my HSA just like my brokerage account. Total stock market ETF and Total International ETF and enough cash (default money market sweep) for any needs over the next year. Everything tracked in Quicken, like normal.
wholeinone04
Posts: 255
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: Tax Treatment of HSA in California

Post by wholeinone04 »

I'm also from CA and I recently invested my HSA money in 2013. I always assumed that tax treatment is exactly the same as a taxable account when it comes to your CA taxes. I'm assuming TT will take care of all the calcs for me and I'll just double check next year when I do my 2014 taxes. My investments($10-$15k) are now with ElfCU/TDA so any buying/selling I do should be reported on 1099's?

I spent some time researching my HSA investments and ended up deciding on 70% Vanguard Small Cap fund(VB) due to low dividend yield which generates less CA taxes(some people also like to tilt towards small cap for extra return? so not a bad investment in my book). I also could do tax loss/gain harvesting this account for CA tax purposes.

I put the other 30% in TIPS since dividends are tax free in CA and I'll only have to pay cap gains when I sell in 10-30 years.. Make sense?

Here's a little more info on what I did: http://yourpfpro.com/finally-invested-hsa-money/
Btw, I used to have money with HSA bank but switched to Elfcu so I could invest all my money with no fees(invest in TDA no fee ETF's) - link is in the HSA wiki
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