HSA and California move

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
seeker24
Posts: 19
Joined: Sun Jul 14, 2019 5:54 pm

HSA and California move

Post by seeker24 »

Hello BHs,

I currently have my job in CA since early 2021, but have been working remotely from OH. Prior to this job, I have been residing in midwest for the last 10 years and have regularly contributed to my HSA from previous employers. I recently moved all my HSA funds from previous employer custodians to Fidelity HSA and invested in FZROX, VTI and FXAIX. Funds sitting at 70k.

With my current employer in CA, I do contribute to HE HSA. it's current value is <1k now. So to summarize, I have 2 HSA accounts:
- Fidelity HSA from previous employers. Not contributing. Funds invested in FZROX, VTI and FXAIX.
- HE HSA from current employer. Contributing but not investing.

I am reading that in CA state, HSA is not tax deductible. And I pay income tax on amount I contribute in HSA. I read through a post on HSA strategies for CA and NJ.

Questions:
- I plan to move to CA by end of 2021. Will be part CA resident by end of this tax year. Will I pay taxes on both my Fidelity HSA and HE HSA for 2021?
- What I can do differently NOW to not attract tax liabilities due to Fidelity HSA when I move to CA?
- Planning to move to CA in Dec this year. Should I delay my move to CA to Jan 2022 to avoid tax issues?

Thanks!
jack.bauer
Posts: 31
Joined: Wed Feb 02, 2011 3:17 pm

Re: HSA and California move

Post by jack.bauer »

Just to make sure its clear that only the CA portion that is taxable. In the bigger case (federal), HSAs are still exempt.

TurboTax (or similar) handles this for you, at least when you are full year CA resident. I remember when I moved to CA more than a decade ago, I had to tweak some input. Dont recall it precisely. But it led to a very minor reduction in my CA tax.


I would not worry much about this at all ... especially if you plan to use HSA for long term stock holding.
User avatar
retired@50
Posts: 5477
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: HSA and California move

Post by retired@50 »

My understanding of the CA HSA situation is that if your HSA account generates dividends from stock holdings, you are supposed to add those dividends to your CA income by using an adjustment. Since HSA dividends wouldn't normally appear on any Federal 1099 form, you have to keep track of them yourself and add them to income for CA. The same logic would hold true for capital gains distributions or capital gains if you sell something inside the HSA account.

If you want to avoid this sort of annual adjustment, you can fill the HSA with U.S. Treasury bonds. Since Treasury bonds aren't taxed at the state level, CA has no claim on the interest earned in an HSA with Treasury bonds.

I suspect that Fidelity offers a Treasury bond fund of some kind that would qualify as "tax-exempt" in CA. I'm not aware of the appropriate ticker, but you could call Fidelity and ask.

Regards,
This is one person's opinion. Nothing more.
User avatar
anon_investor
Posts: 6119
Joined: Mon Jun 03, 2019 1:43 pm

Re: HSA and California move

Post by anon_investor »

OP, if you don't live in CA, is your investment income even subject to CA tax?
SuzBanyan
Posts: 518
Joined: Thu Jun 02, 2016 11:20 am

Re: HSA and California move

Post by SuzBanyan »

anon_investor wrote: Sun May 02, 2021 9:03 am OP, if you don't live in CA, is your investment income even subject to CA tax?
OP said they were moving to CA before the end of 2021.

OP: The best way to think of an HSA when you are a CA resident is that CA treats it just like a taxable account. So, just like you don’t get a tax deduction for putting new funds in a brokerage account, so too you don’t get a deduction on your CA return for making a contribution to an HSA. When you earn dividends, interest or capital gains in your HSA, all are taxable income on your CA return. The further difference is that, as retired@50 pointed out, there is no 1099 issued to tell you how much income to report to CA, so you need to keep good records.
User avatar
anon_investor
Posts: 6119
Joined: Mon Jun 03, 2019 1:43 pm

Re: HSA and California move

Post by anon_investor »

SuzBanyan wrote: Sun May 02, 2021 11:54 am
anon_investor wrote: Sun May 02, 2021 9:03 am OP, if you don't live in CA, is your investment income even subject to CA tax?
OP said they were moving to CA before the end of 2021.

OP: The best way to think of an HSA when you are a CA resident is that CA treats it just like a taxable account. So, just like you don’t get a tax deduction for putting new funds in a brokerage account, so too you don’t get a deduction on your CA return for making a contribution to an HSA. When you earn dividends, interest or capital gains in your HSA, all are taxable income on your CA return. The further difference is that, as retired@50 pointed out, there is no 1099 issued to tell you how much income to report to CA, so you need to keep good records.
The OP says their job is in CA but they are working remotely in OH. I don't know how that would work tax wise. Probably makes sense to figure that out first.
SuzBanyan
Posts: 518
Joined: Thu Jun 02, 2016 11:20 am

Re: HSA and California move

Post by SuzBanyan »

anon_investor wrote: Sun May 02, 2021 2:03 pm
SuzBanyan wrote: Sun May 02, 2021 11:54 am
anon_investor wrote: Sun May 02, 2021 9:03 am OP, if you don't live in CA, is your investment income even subject to CA tax?
OP said they were moving to CA before the end of 2021.

OP: The best way to think of an HSA when you are a CA resident is that CA treats it just like a taxable account. So, just like you don’t get a tax deduction for putting new funds in a brokerage account, so too you don’t get a deduction on your CA return for making a contribution to an HSA. When you earn dividends, interest or capital gains in your HSA, all are taxable income on your CA return. The further difference is that, as retired@50 pointed out, there is no 1099 issued to tell you how much income to report to CA, so you need to keep good records.
The OP says their job is in CA but they are working remotely in OH. I don't know how that would work tax wise. Probably makes sense to figure that out first.
From the original post: “ I plan to move to CA by end of 2021. Will be part CA resident by end of this tax year.”
quantAndHold
Posts: 5527
Joined: Thu Sep 17, 2015 10:39 pm

Re: HSA and California move

Post by quantAndHold »

If you have substantial capital gains in either account, it would be worthwhile to do an exchange into a different mutual fund to recognize the cap gains before you move to CA.

Beyond that, assuming you’re planning on holding the HSA until retirement, your best bet is to pick an investment that’s tax efficient. Most people either use a federal bond fund (taxable federally, which you don’t care about, and state tax free) or a stock index fund (tax efficient overall).
Yes, I’m really that pedantic.
User avatar
grabiner
Advisory Board
Posts: 29683
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: HSA and California move

Post by grabiner »

If you don't have any carryover capital losses, you should harvest gains in the HSA before moving to CA.

If you do have carryover capital losses, this won't help directly, because you will eat into your carryover; CA residents can carry over capital losses from before they became residents. For example, if you have $9K in carryover losses, and sell stock in your HSA for a $5K gain as a non-CA resident, you will only have $4K of CA capital loss to carry over when you become a resident; this is no better than if you moved to CA and then sold.

You may still want to sell, even if there is no direct tax benefit, so that you can hold something more tax-efficient in the HSA. If Treasuries or TIPS fit your investment needs, they should be in your CA HSA. If not, something like Total Stock Market Index, with low dividends and no capital-gains distributions, is reasonably tax-efficient.

(Note that this is specific to CA. NJ does not allow capital loss carryovers, so NJ residents always benefit from harvesting capital gains before moving to NJ.)
Wiki David Grabiner
babystep
Posts: 416
Joined: Tue Apr 09, 2019 9:44 am

Re: HSA and California move

Post by babystep »

I don't see any reason that CA will not tax your other HSA. We love to tax everything here in CA. :mrgreen:

Your annual CA tax on the HSA investments will be about $100.

Assume 9.3% CA tax rate, 70k with 1.5% dividend. 0.93*70000*0.015 = $97.65 CA tax. This is about 0.14% per year. You could reduce this by maybe $35 by buying more tax efficient funds.

After you move to CA then every month that you contribute to HSA will not be CA tax sheltered. But what you might be able to do is pre-fund the HSA in Jan before you move to CA. i.e. Contribute $7000 to HSA at the start of the year before you move to CA. This will save you about $700 in CA taxes.

Also, you might want to move-up your cost basis before you move. e.g. sell everything in HSA and buy something equivalent. This might save thousands in taxes if you continue to reside in CA and then decide to sell anything from your HSA.

Looks like you have done an amazing job with the HSA.
Topic Author
seeker24
Posts: 19
Joined: Sun Jul 14, 2019 5:54 pm

Re: HSA and California move

Post by seeker24 »

grabiner wrote: Sun May 02, 2021 3:35 pm If you don't have any carryover capital losses, you should harvest gains in the HSA before moving to CA.

If you do have carryover capital losses, this won't help directly, because you will eat into your carryover; CA residents can carry over capital losses from before they became residents. For example, if you have $9K in carryover losses, and sell stock in your HSA for a $5K gain as a non-CA resident, you will only have $4K of CA capital loss to carry over when you become a resident; this is no better than if you moved to CA and then sold.

You may still want to sell, even if there is no direct tax benefit, so that you can hold something more tax-efficient in the HSA. If Treasuries or TIPS fit your investment needs, they should be in your CA HSA. If not, something like Total Stock Market Index, with low dividends and no capital-gains distributions, is reasonably tax-efficient.

(Note that this is specific to CA. NJ does not allow capital loss carryovers, so NJ residents always benefit from harvesting capital gains before moving to NJ.)
Thank you. I don't have carryover capital losses from previous years. If I understood it correctly, I should adjust my current holdings in Fidel HSA (FZROX, VTI, FXAIX) to some Treasuries funds before I move to CA? I am trying to see how this will play out between OH and CA taxes. Maybe I should do a dummy tax return for state to understand better.
Topic Author
seeker24
Posts: 19
Joined: Sun Jul 14, 2019 5:54 pm

Re: HSA and California move

Post by seeker24 »

babystep wrote: Sun May 02, 2021 5:10 pm I don't see any reason that CA will not tax your other HSA. We love to tax everything here in CA. :mrgreen:

Your annual CA tax on the HSA investments will be about $100.

Assume 9.3% CA tax rate, 70k with 1.5% dividend. 0.93*70000*0.015 = $97.65 CA tax. This is about 0.14% per year. You could reduce this by maybe $35 by buying more tax efficient funds.

After you move to CA then every month that you contribute to HSA will not be CA tax sheltered. But what you might be able to do is pre-fund the HSA in Jan before you move to CA. i.e. Contribute $7000 to HSA at the start of the year before you move to CA. This will save you about $700 in CA taxes.

Also, you might want to move-up your cost basis before you move. e.g. sell everything in HSA and buy something equivalent. This might save thousands in taxes if you continue to reside in CA and then decide to sell anything from your HSA.

Looks like you have done an amazing job with the HSA.
Thank you. My source of income is from CA. But currently working outside of CA. So I was assuming I won't be hit by CA taxes yet until I become a CA resident.

Regards to contributing to HSA, I can only contribute per paycheck and can't pre-fund all at once through the employer. Looks like I would get hit by this in 2022 more than it will be in 2021.

So what I am gathering is:
- The HSA account where I am actively contributing will get hit by CA taxes.
- The Fidelity HSA where I am NOT contributing and NOT selling funds will attract taxes on dividends.
- If I choose to, I should consider moving my Fidel investments to Treasuries to avoid tax paperwork if I continue to stay in CA.

Did I get that right? TIA.
babystep
Posts: 416
Joined: Tue Apr 09, 2019 9:44 am

Re: HSA and California move

Post by babystep »

seeker24 wrote: Sun May 02, 2021 7:14 pm
babystep wrote: Sun May 02, 2021 5:10 pm I don't see any reason that CA will not tax your other HSA. We love to tax everything here in CA. :mrgreen:

Your annual CA tax on the HSA investments will be about $100.

Assume 9.3% CA tax rate, 70k with 1.5% dividend. 0.93*70000*0.015 = $97.65 CA tax. This is about 0.14% per year. You could reduce this by maybe $35 by buying more tax efficient funds.

After you move to CA then every month that you contribute to HSA will not be CA tax sheltered. But what you might be able to do is pre-fund the HSA in Jan before you move to CA. i.e. Contribute $7000 to HSA at the start of the year before you move to CA. This will save you about $700 in CA taxes.

Also, you might want to move-up your cost basis before you move. e.g. sell everything in HSA and buy something equivalent. This might save thousands in taxes if you continue to reside in CA and then decide to sell anything from your HSA.

Looks like you have done an amazing job with the HSA.
Thank you. My source of income is from CA. But currently working outside of CA. So I was assuming I won't be hit by CA taxes yet until I become a CA resident.

Regards to contributing to HSA, I can only contribute per paycheck and can't pre-fund all at once through the employer. Looks like I would get hit by this in 2022 more than it will be in 2021.

So what I am gathering is:
- The HSA account where I am actively contributing will get hit by CA taxes.
- The Fidelity HSA where I am NOT contributing and NOT selling funds will attract taxes on dividends.
- If I choose to, I should consider moving my Fidel investments to Treasuries to avoid tax paperwork if I continue to stay in CA.

Did I get that right? TIA.
Yes.

You can contribute to the another HSA outside the employer HSA and prefund. You might need to check if there any requirements for matching contributions from the employer. Please see https://healthsavings.com/about-hsas/contributions/
Can I Contribute Outside Of Payroll Deductions?

Yes. You may contribute to your HSA outside of payroll deductions by contributing online or by mail. (See “How do I contribute?”) Be sure to monitor your contributions to ensure that you do not exceed IRS annual contribution limits.
Please see this one also about pre-funding.
https://20somethingfinance.com/contribu ... deduction/
User avatar
grabiner
Advisory Board
Posts: 29683
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: HSA and California move

Post by grabiner »

seeker24 wrote: Sun May 02, 2021 7:04 pm
grabiner wrote: Sun May 02, 2021 3:35 pm If you don't have any carryover capital losses, you should harvest gains in the HSA before moving to CA.

If you do have carryover capital losses, this won't help directly, because you will eat into your carryover; CA residents can carry over capital losses from before they became residents. For example, if you have $9K in carryover losses, and sell stock in your HSA for a $5K gain as a non-CA resident, you will only have $4K of CA capital loss to carry over when you become a resident; this is no better than if you moved to CA and then sold.

You may still want to sell, even if there is no direct tax benefit, so that you can hold something more tax-efficient in the HSA. If Treasuries or TIPS fit your investment needs, they should be in your CA HSA. If not, something like Total Stock Market Index, with low dividends and no capital-gains distributions, is reasonably tax-efficient.

(Note that this is specific to CA. NJ does not allow capital loss carryovers, so NJ residents always benefit from harvesting capital gains before moving to NJ.)
Thank you. I don't have carryover capital losses from previous years. If I understood it correctly, I should adjust my current holdings in Fidel HSA (FZROX, VTI, FXAIX) to some Treasuries funds before I move to CA? I am trying to see how this will play out between OH and CA taxes. Maybe I should do a dummy tax return for state to understand better.
In the year you move to CA, you will file part-year-resident taxes for both CA and OH. You will pay OH tax only on the income you earn while an OH resident (or income with a source in OH), and CA tax only on the income you earn while a CA resident (or income with a source in CA).

OH doesn't tax anything in the HSA (unless you withdraw from it for non-medical expenses). CA treats the HSA as an ordinary brokerage account. Therefore, you should realize all the income in the HSA before moving. If you sell for a capital gain while you are not a CA resident, CA will not tax it. And if you hold a Treasury fund, CA will not tax the dividends. (CA does tax capital gains on Treasury funds, but those will be very low.)
Regards to contributing to HSA, I can only contribute per paycheck and can't pre-fund all at once through the employer. Looks like I would get hit by this in 2022 more than it will be in 2021.
If you use payroll deduction, you can probably contribute enough per paycheck to max out your HSA before leaving OH. Alternatively, you could contribute directly to the HSA rather than using payroll deduction, maxing out while still an OH resident. Direct contributions are subject to SS tax (but that may not be a real cost, as it increases your SS benefit), but you would avoid CA tax.

I did this both ways when I moved into and out of NJ. In 2010, when I moved into NJ in November, I increased my payroll deduction to max out the HSA before moving in. In 2013, when I moved from NJ to MD in December, I wasn't in MD long enough to max out the HSA by payroll deduction, so I wrote a check to max it out after moving to MD.
Wiki David Grabiner
Makefile
Posts: 713
Joined: Fri Apr 22, 2016 11:03 pm

Re: HSA and California move

Post by Makefile »

anon_investor wrote: Sun May 02, 2021 9:03 am OP, if you don't live in CA, is your investment income even subject to CA tax?
Some states structure their nonresident income tax by first having you calculate the tax as if you did live there, then give you a credit for the out-of-state portion for your income. Essentially they are having you apply the progressive rate structure to your income to determine an effective tax rate, but then only tax your income sourced in that state at that rate. And it is not only California
User avatar
dual
Posts: 729
Joined: Mon Feb 26, 2007 7:02 pm

Re: HSA and California move

Post by dual »

delete
Last edited by dual on Mon May 03, 2021 12:34 am, edited 1 time in total.
User avatar
dual
Posts: 729
Joined: Mon Feb 26, 2007 7:02 pm

Re: HSA and California move

Post by dual »

You can also invest part of your HSA in Berkshire BRK. I do that with about a third of the assets in my Fidelity HSA. I have a record of the basis. The rest in the assets in a Treasury only money market fund. If/when rates on Treasuries rise above zero, I will set up an autoroll.
User avatar
anon_investor
Posts: 6119
Joined: Mon Jun 03, 2019 1:43 pm

Re: HSA and California move

Post by anon_investor »

If subject to California income taxes on HSA dividends and capital gains, I would just invest as I would in a taxable account. Buying ETFs that do not have annual capital gains distributions and lower dividend yields (e.g. VTI). Some people might even go as far as to buy growth index ETFs like VUG or SCHG which have lower dividends.
Post Reply