Moving to California - What to do with HSA?

[avg3fund]

Hi Bogleheads,

I am moving from NC to CA next month. I am employed in NC and working remotely. My employer contributes some to my HSA, and I have been contributing on top of that to meet the annual maximum. Now that I am moving to CA, I am a bit stressed to find out that I apparently need to manually track the account as I may not receive a tax form like I would for a regular brokerage account.

Please help me simplify my future taxes as much as possible! I understand some of the investing basics but tax stuff really confuses me and I need to keep things simple. If that means selling assets in the account or contributing elsewhere while I live in CA so be it. Manually tracking interest and dividends earned is not something I want to do with my time.

I'm not sure if it matters, but technically I have 2 HSA accounts. One is where my employer contributes, and I do not invest there. My employer does not allow me to specify an account for their contributions. That HSA stays in cash until I transfer the assets a couple times a year to my Fidelity account where I actually invest the funds and add my own contributions.

I've only had an HSA for a few years, so it's sitting at about 10k, invested in VTI and VXUS.

To summarize:
HSA Account 1: employer contributions, stays in cash
HSA Account 2: currently invested in VTI and VXUS. Money from HSA 1 gets rolled over here.

What do I need to do before moving to avoid any of the manual tracking that CA may require? TIA

[RyeBourbon]

I would look into selling your holdings and rebuying a similar but not identical holding to reset to a higher basis since you will pay CA tax on any gains if you have to sell.

[Morgan22]

Or you could use your HSA, while you live in CA, as part of your bond allocation. You could sell your positions and move into a TIPS or other Treasury Only fund before you move out there. Then you won't need to track since Treasury funds are state tax free.

At least, this is what we did before we moved to CA a few years back. Now that we've moved out of state recently, I'm thinking of switching back to an S&P 500 fund.

[Big Dog]

Or you could use your HSA, while you live in CA, as part of your bond allocation. You could sell your positions and move into a TIPS or other Treasury Only fund before you move out there. Then you won't need to track since Treasury funds are state tax free.

Yes, this is what many Californians do to avoid the hassle of tracking.

[dual]

I invest my Fidelity California HSA in treasury bills, Berkshire Hathaway stock BRK.B that never pays dividends, and a treasury only money market fund FDLXX.

[lifebeckonss]

Wow I never thought of this. I am in California and have been funding the HSA to the max with employer match for the last 2 years. All of it in Vanguard Total International ETF. And so far I haven’t done anything for CA State Taxes. Is there any reporting requirements even before you sell anything? My plan is to keep maxing it out while I am working and pay any medical copays out of pocket.

[exodusNH]

Wow I never thought of this. I am in California and have been funding the HSA to the max with employee match for the last 2 years. All of it in Vanguard Total International ETF. And so far I haven’t done anything for CA State Taxes. Is there any reporting requirements even before you sell anything? My plan is to keep maxing it out while I am working and pay any medical copays out of pocket.

If you're holding stuff that generates dividends or interest, yeah, probably unless that's all from interest on government obligations.

[lakpr]

Wow I never thought of this. I am in California and have been funding the HSA to the max with employee match for the last 2 years. All of it in Vanguard Total International ETF. And so far I haven’t done anything for CA State Taxes. Is there any reporting requirements even before you sell anything? My plan is to keep maxing it out while I am working and pay any medical copays out of pocket.

Who is filing your taxes? Are you doing it yourself, if so paper or using a tax software?

I am in NJ, similar issue as CA -- the state does not recognize HSA accounts. I use TaxAct, and the software specifically asks if we own any HSA accounts, and to report the year-end balances in the input. It then automatically tracks the tax impact.

[inspector00]

The only thing I can think of is selling all your HSA stocks and buying treasury bonds in your HSA before you leave the state. You'll only get interest at maturity and that interest is exempt from state taxes. You'll still technically need to report any interest on the money in cash but if you move it over to buy treasury bonds immediately then the interest would be negligible.

Alternatively you can leave the money as it is and I'm sure it's not hard to get the total interest from your brokerage account to report on your taxes.

[lifebeckonss]

Who is filing your taxes? Are you doing it yourself, if so paper or using a tax software?

I am in NJ, similar issue as CA -- the state does not recognize HSA accounts. I use TaxAct, and the software specifically asks if we own any HSA accounts, and to report the year-end balances in the input. It then automatically tracks the tax impact.

Lakpr I do it myself using TurboTax and I may have ignored the HSA part thinking I never sold anything. Will have to check it out next year. Not sure what to do for the last 2 years retroactively. It’s still a small account with $15K balance.

[lakpr]

Who is filing your taxes? Are you doing it yourself, if so paper or using a tax software?

I am in NJ, similar issue as CA -- the state does not recognize HSA accounts. I use TaxAct, and the software specifically asks if we own any HSA accounts, and to report the year-end balances in the input. It then automatically tracks the tax impact.

Lakpr I do it myself using TurboTax and I may have ignored the HSA part thinking I never sold anything. Will have to check it out next year. Not sure what to do for the last 2 years retroactively. It’s still a small account with $15K balance.

2 years is still within the time period where you can file amended tax returns ... but yeah, now may be a good time to review the last two years of tax returns ...

[avg3fund]

Thanks for the replies so far! So it sounds like I need to
1) Sell current assets within HSA 2
2) Re-invest the funds into something that is not subject to CA state taxes

If I do these two steps, I can avoid all manual tracking and tax prep around this, right? And I could still contribute to the state-tax-exempt fund. And when tax season comes around, I enter employer contributions & personal contributions to the account like normal and those get taxed because I live in CA. BUT, nothing beyond that would be required for taxes...did I get that right?

If so, I just need to figure out the best fund option that Fidelity offers for the HSA. I am a little confused about how to pick. FDLXX seems ok? Not totally clear on what all the options are there.

[lakpr]

Thanks for the replies so far! So it sounds like I need to
1) Sell current assets within HSA 2
2) Re-invest the funds into something that is not subject to CA state taxes

If I do these two steps, I can avoid all manual tracking and tax prep around this, right? And I could still contribute to the state-tax-exempt fund. And when tax season comes around, I enter employer contributions & personal contributions to the account like normal and those get taxed because I live in CA. BUT, nothing beyond that would be required for taxes...did I get that right?

If so, I just need to figure out the best fund option that Fidelity offers for the HSA. I am a little confused about how to pick. FDLXX seems ok? Not totally clear on what all the options are there.

The steps are correct, but I think you may mistaken in that you can avoid all manual tracking. As I mentioned above, the tax software does ask the year-end balances in HSA accounts when filing state taxes, and you will need to report them. You may be exempt from state taxes, and I think there would be another question related to that (about what investments your money is invested in), your contributions during the year to track the basis, etc.

[cowbman]

One other thing to point out is you maintain your federal tax deduction (pre-tax), but California doesn't recognize this piece either.

[Gnick]

I've talked to 3 accountants in NJ about HSA investments. All say that there is no requirement to track them or pay tax on them. I know they're wrong. I also know there is a bill going through so that the government can tax HSA investments, but I won't hold my breath.

regardless, I hold all of my HSA deductions and dividends in cash until January and then invest once a year. I track it that way.

[miket29]

Thanks for the replies so far! So it sounds like I need to
1) Sell current assets within HSA 2
2) Re-invest the funds into something that is not subject to CA state taxes

If I do these two steps, I can avoid all manual tracking and tax prep around this, right?

Unfortunately no. If you invest in a Federal bond fund such as FUMBX you still will have capital gains or losses when you sell as market interest rates change and the per-share value goes up and down. The monthly interest paid from the fund is tax-exempt, though.

[surtu]

OP, here's a thread on CA HSA investing to minimize paperwork: viewtopic.php?t=302856. Note that Treasury funds may distribute capital gains which you would then have to report. Holding individual treasuries to maturity avoids this. If Treasury bonds are already part of your portfolio (perhaps within Total Bond), then it makes sense to hold them in your HSA as a CA investor. If not, the tax reporting is doable. See the "Make Your Life Easier" section of https://thefinancebuff.com/california-n ... eturn.html.

[crystalbank]

Sell VTI and VXUS, then buy BRK-B.

[Statistical]

One thing you should absolutely do is sell everything and buy "something" if you are sitting on gains. This will reset your basis and no matter happens in the future reduce taxes.

As for the something you have a couple options
1) Buy VTI again. There are no wash sales on gains. Downside is you will owe taxes on any dividends but you at least get the benefit of resetting the basis.

2) Buy VUG in the HSA and a comparable amount of VTV in another non-HSA account. VTV + VUG combined are comparable to VTI. VUG has less dividends so less taxable gain in CA.

3) Buy treasury bonds or treasury bond fund. The interest is state tax exempt. Never need to pay or worry about CA income taxes on HSA.

[surtu]

Sell VTI and VXUS, then buy BRK-B.

If a single stock meets your needs, then sure. You'll still have capital gains and manual tracking if you sell. Most here would advocate for indexing instead of individual stocks. Individual Treasuries do not have the diversification issue like individual stocks.

[WinstonTeracina]

I would look into selling your holdings and rebuying a similar but not identical holding to reset to a higher basis since you will pay CA tax on any gains if you have to sell.

No need to find a similar but not identical holding since he is harvesting gains, not losses and there wouldn't be any wash sale to apply. As a resident of CA, I concur with many of the other responses; any holdings with unrealized gains should be sold before you move to to the state. What to you choose to hold in your HSA is a matter of preference and convenience. Since you won't get a 1099 for your HSA, any taxable events have to be tracked mannually by you. Some would advocate holding some sort of treasury fund so that the interest income is free of state tax but taxes still get tricky if those treasury bond funds make capital distributions during the year. I personally hold VT and don't find it a problem to find 4 dividend distributions a year and add them to my state tax return.

[WinstonTeracina]

Wow I never thought of this. I am in California and have been funding the HSA to the max with employee match for the last 2 years. All of it in Vanguard Total International ETF. And so far I haven’t done anything for CA State Taxes. Is there any reporting requirements even before you sell anything? My plan is to keep maxing it out while I am working and pay any medical copays out of pocket.

Who is filing your taxes? Are you doing it yourself, if so paper or using a tax software?

I am in NJ, similar issue as CA -- the state does not recognize HSA accounts. I use TaxAct, and the software specifically asks if we own any HSA accounts, and to report the year-end balances in the input. It then automatically tracks the tax impact.

Wouldn't that mean that you could be paying taxes on unrealized gains if you simply compared your starting and ending year balances? I'm not familiar with how HSAs are taxed in New Jersey but that seems like an overly simplified way to calculate the tax liablity.

[CFM300]

Or you could use your HSA, while you live in CA, as part of your bond allocation. You could sell your positions and move into a TIPS or other Treasury Only fund before you move out there. Then you won't need to track since Treasury funds are state tax free.

Yes, this is what many Californians do to avoid the hassle of tracking.

You still have to report dividends from a Treasury fund, even though they're not taxable in CA. The dividends are added and then subtracted on Schedule CA (54) California Adjustments.

[CFM300]

Or you could use your HSA, while you live in CA, as part of your bond allocation. You could sell your positions and move into a TIPS or other Treasury Only fund before you move out there. Then you won't need to track since Treasury funds are state tax free.

Yes, this is what many Californians do to avoid the hassle of tracking.

You still have to report dividends from a Treasury fund, even though they're not taxable in CA. The dividends are added and then subtracted on Schedule CA (540) California Adjustments.

[lakpr]

Wouldn't that mean that you could be paying taxes on unrealized gains if you simply compared your starting and ending year balances? I'm not familiar with how HSAs are taxed in New Jersey but that seems like an overly simplified way to calculate the tax liablity.

Yes, but I believe that is exactly what the NJ law says, you have to pay taxes on any gains in HSA whether or not you sold

[avg3fund]

Thanks all for the replies. I've read them all and the links provided. To be honest I don't understand a lot of the investing jargon and there are so many variables. I don't even know if I have gains or losses in the account. It almost seems like I should sell everything and just hold it in cash. I probably won't live in CA forever.

[exodusNH]

Thanks all for the replies. I've read them all and the links provided. To be honest I don't understand a lot of the investing jargon and there are so many variables. I don't even know if I have gains or losses in the account. It almost seems like I should sell everything and just hold it in cash. I probably won't live in CA forever.

Gains and losses probably don't matter. It's the "income" received, which would be the dividend payouts.

I have a pretty basic HSA provider. When I log in, I can see the dividend payouts. You'd simply be claiming those.

E.g., on June 29, there was a $21.12 dividend paid out.

You just need to log in once a year and grab the 4 data points. (It pays out quarterly.)

I just have the funds sitting in a S&P 500 fund, though I'm forced to keep $2000 in cash at a crappy interest rate. The excess is swept into the S&P 500.

[surtu]

Keep reading and keep asking questions. You can determine if you have gains or losses by carefully reviewing all your previous HSA statements and comparing purchase prices to today's prices, including any reinvestment of dividends. But it doesn't matter. There are not yet tax consequences for you if you simply sell everything. Even if you turn around a repurchase exactly what you just sold (what would normally be a wash sale).

This thread is linked in a response to the thread I shared previously. viewtopic.php?f=1&t=301403&p=4970724#p4970724. It accomplishes your goal of minimizing paperwork. Since you're at Fidelity put everything in the FDLXX Treasury Only Money Market as a starting point. It won't have gains to report and the interest will be CA tax exempt. This accomplishes your "just hold it in cash" plan. But if you wouldn't normally have cash as part of your portfolio but you would hold a bond fund with longer duration, you can purchase Treasury Bills, or Notes, or Bonds with similar duration when you're ready to take that step. Or alternatively when you're ready you can start purchasing and tracking funds and their dividends in the manner described in The Finance Buff's article, but you'll have a clean slate if you sell everything prior to moving to California.

[avg3fund]

Keep reading and keep asking questions. You can determine if you have gains or losses by carefully reviewing all your previous HSA statements and comparing purchase prices to today's prices, including any reinvestment of dividends. But it doesn't matter. There are not yet tax consequences for you if you simply sell everything. Even if you turn around a repurchase exactly what you just sold (what would normally be a wash sale).

This thread is linked in a response to the thread I shared previously. viewtopic.php?f=1&t=301403&p=4970724#p4970724. It accomplishes your goal of minimizing paperwork. Since you're at Fidelity put everything in the FDLXX Treasury Only Money Market as a starting point. It won't have gains to report and the interest will be CA tax exempt. This accomplishes your "just hold it in cash" plan. But if you wouldn't normally have cash as part of your portfolio but you would hold a bond fund with longer duration, you can purchase Treasury Bills, or Notes, or Bonds with similar duration when you're ready to take that step. Or alternatively when you're ready you can start purchasing and tracking funds and their dividends in the manner described in The Finance Buff's article, but you'll have a clean slate if you sell everything prior to moving to California.

Thanks all for the replies. I've read them all and the links provided. To be honest I don't understand a lot of the investing jargon and there are so many variables. I don't even know if I have gains or losses in the account. It almost seems like I should sell everything and just hold it in cash. I probably won't live in CA forever.

Gains and losses probably don't matter. It's the "income" received, which would be the dividend payouts.

I have a pretty basic HSA provider. When I log in, I can see the dividend payouts. You'd simply be claiming those.

E.g., on June 29, there was a $21.12 dividend paid out.

You just need to log in once a year and grab the 4 data points. (It pays out quarterly.)

I just have the funds sitting in a S&P 500 fund, though I'm forced to keep $2000 in cash at a crappy interest rate. The excess is swept into the S&P 500.

Thank you both for simplifying things even more for me! It sounds like maybe if I sell everything this month, limit purchases going forward to a couple times a year, and don't re-invest dividends I can simplify things enough for CA taxes and figure out more along the way. I don't really understand the concept of a wash sale but it seems like if I were to wait >30 days before re-purchasing VTI and VXUS I would avoid that either way.

I really appreciate everyone's replies.

[exodusNH]

Keep reading and keep asking questions. You can determine if you have gains or losses by carefully reviewing all your previous HSA statements and comparing purchase prices to today's prices, including any reinvestment of dividends. But it doesn't matter. There are not yet tax consequences for you if you simply sell everything. Even if you turn around a repurchase exactly what you just sold (what would normally be a wash sale).

This thread is linked in a response to the thread I shared previously. viewtopic.php?f=1&t=301403&p=4970724#p4970724. It accomplishes your goal of minimizing paperwork. Since you're at Fidelity put everything in the FDLXX Treasury Only Money Market as a starting point. It won't have gains to report and the interest will be CA tax exempt. This accomplishes your "just hold it in cash" plan. But if you wouldn't normally have cash as part of your portfolio but you would hold a bond fund with longer duration, you can purchase Treasury Bills, or Notes, or Bonds with similar duration when you're ready to take that step. Or alternatively when you're ready you can start purchasing and tracking funds and their dividends in the manner described in The Finance Buff's article, but you'll have a clean slate if you sell everything prior to moving to California.

Thanks all for the replies. I've read them all and the links provided. To be honest I don't understand a lot of the investing jargon and there are so many variables. I don't even know if I have gains or losses in the account. It almost seems like I should sell everything and just hold it in cash. I probably won't live in CA forever.

Gains and losses probably don't matter. It's the "income" received, which would be the dividend payouts.

I have a pretty basic HSA provider. When I log in, I can see the dividend payouts. You'd simply be claiming those.

E.g., on June 29, there was a $21.12 dividend paid out.

You just need to log in once a year and grab the 4 data points. (It pays out quarterly.)

I just have the funds sitting in a S&P 500 fund, though I'm forced to keep $2000 in cash at a crappy interest rate. The excess is swept into the S&P 500.

Thank you both for simplifying things even more for me! It sounds like maybe if I sell everything this month, limit purchases going forward to a couple times a year, and don't re-invest dividends I can simplify things enough for CA taxes and figure out more along the way. I don't really understand the concept of a wash sale but it seems like if I were to wait >30 days before re-purchasing VTI and VXUS I would avoid that either way.

I really appreciate everyone's replies.

Dividends are income regardless if you reinvest. Interest is income regardless if you reinvest.

Selling and rebuying to reset your basis is 100% OK. Wash sales are 100% OK unless you're trying to claim a loss.

Making additional purchases is 100% OK. You'll just have slightly more dividends.

I would just hold US in the account. International tends to pay more dividends. Just rebalance in another account.

Dividends are about 1.5%. It's not a lot of money to pay tax on AND if you're holding VTI, it's only 4 times per year.

[bd7]

As was mentioned above, just convert everything to FDLXX before you move. 'Manual tracking' is no big deal if you keep it all simple--Fidelity will tell you what you've earned in the account during the year and FreeTaxUSA (or hopefully whatever software you use) is aware that CA doesn't recognize the deduction for HSA contributions and you'll have to add that back in on your CA return.

[miket29]

Gains and losses probably don't matter. It's the "income" received, which would be the dividend payouts.

I have a pretty basic HSA provider. When I log in, I can see the dividend payouts. You'd simply be claiming those.

E.g., on June 29, there was a $21.12 dividend paid out.

You just need to log in once a year and grab the 4 data points. (It pays out quarterly.)

I just have the funds sitting in a S&P 500 fund, though I'm forced to keep $2000 in cash at a crappy interest rate. The excess is swept into the S&P 500.

Realized gains are taxable and need to be reported on your CA tax return. If you draw down the cash on hand to pay medical expenses and eventually sell some of the S&P 500 fund to replenish your cash balance then the capital gains are taxable.

[JD2775]

I can't answer what to do with your existing funds, but I am in CA and I invest my HSA 100% into VTI. My HSA provider (BofA) has the dividends laid out clearly on their website, I just add them up at the end of the year and enter that into Turbo Tax during tax time. Simple. I don't know why people make such a big deal out of it, and try to optimize their holdings in there to avoid taxes. I would rather have VTI growth over the years and pay the dividend tax than some low yielding government muni fund or whatever.
Yea it sucks you don't get the tax breaks that you do in other states, but to me it's just like another brokerage account that I can contribute to pre-tax.

[cacophony]

I have an HSA in California managed by Payflex. At the end of the year they provide a document that shows the total investment dividends, long term capital gains, and short term capital gains for the year. This makes it easy to deal with for taxes so I'm not sure why it makes sense to avoid investing the HSA in an equity index fund like the S&P 500.

[otinkyad]

At TD Ameritrade, the annual interest, dividends, and capital gains were reported on the December statements. I moved to Fidelity last year, and the interest and dividends were there. I didn’t sell anything at Fidelity and I don’t remember if capital gains were reported.

[ducksauce9]

Can HSA account fees (e.g. my $3 monthly maintenance fee) be netted against dividends when calculating HSA taxable income in CA?

[single2019]

Wouldn't that mean that you could be paying taxes on unrealized gains if you simply compared your starting and ending year balances? I'm not familiar with how HSAs are taxed in New Jersey but that seems like an overly simplified way to calculate the tax liablity.

Yes, but I believe that is exactly what the NJ law says, you have to pay taxes on any gains in HSA whether or not you sold

Can you provide a source for the NJ law. I could not find anything that suggested paying taxes on unrealized capital gains

[Morgan22]

If you don't want to have to track or report anything, just move all of your HSA assets in FDLXX, Fidelity Treasury Only Money Market. Dividends are tax-free for CA and since its a money market fund, the NAV will stay at $1, so no capital gains.

[exodusNH]

If you don't want to have to track or report anything, just move all of your HSA assets in FDLXX, Fidelity Treasury Only Money Market. Dividends are tax-free for CA and since its a money market fund, the NAV will stay at $1, so no capital gains.

Based on an earlier post, CA wants you to track it. You enter the gains on line X and then record an offsetting entry on line Y since it's not taxable.

A single fund like VTI only pays dividends 4 times a year. The transactions should be very clear.

If the HSA isn't spent from, there will be no other gains.

OP should sell and rebuy to reset his basis so that if he does need to spend from it, he benefits from the higher basis.

[lakpr]

Wouldn't that mean that you could be paying taxes on unrealized gains if you simply compared your starting and ending year balances? I'm not familiar with how HSAs are taxed in New Jersey but that seems like an overly simplified way to calculate the tax liablity.

Yes, but I believe that is exactly what the NJ law says, you have to pay taxes on any gains in HSA whether or not you sold

Can you provide a source for the NJ law. I could not find anything that suggested paying taxes on unrealized capital gains

No citations or sources, only “I believe”, and my responses to the TaxAct software prompts. Sorry. Please do your own research.

While I have a HSA, it is from at least 12 years ago; our insurance plan (through my wife) is not compatible with HSA since then so there hadnt been any contributions

[grabiner]

Or you could use your HSA, while you live in CA, as part of your bond allocation. You could sell your positions and move into a TIPS or other Treasury Only fund before you move out there. Then you won't need to track since Treasury funds are state tax free.

Yes, this is what many Californians do to avoid the hassle of tracking.

You still have to track funds in CA (including reinvested dividends), because CA taxes capital gains on Treasury bonds and funds. The tax bill will be low because Treasury bonds get most of their return from dividends, but you will have gains or losses when rates fall or rise.

In contrast, NJ does not tax capital gains on "qualified investment funds" which hold Treasury bonds, so an HSA invested in a Treasury bond fund will be tax-free in NJ. (If the fund holds some non-Treasury bonds, you will have to prorate income, and prorate capital gains if the fund is qualified.)

[Artsdoctor]

Or you could use your HSA, while you live in CA, as part of your bond allocation. You could sell your positions and move into a TIPS or other Treasury Only fund before you move out there. Then you won't need to track since Treasury funds are state tax free.

Yes, this is what many Californians do to avoid the hassle of tracking.

You still have to report dividends from a Treasury fund, even though they're not taxable in CA. The dividends are added and then subtracted on Schedule CA (540) California Adjustments.

That's interesting. I didn't know that and I've never had an accountant do that. Treasury interest is not taxed at the local level so the tax implications would be exactly the same without any future ramifications (not adding/subtracting versus add/subtracting). I couldn't find any guidance on the FTB website about this but this detail may be too "in the weeds" for the FTB.

[miket29]

You still have to report dividends from a Treasury fund, even though they're not taxable in CA. The dividends are added and then subtracted on Schedule CA (540) California Adjustments.

That's interesting. I didn't know that and I've never had an accountant do that. Treasury interest is not taxed at the local level so the tax implications would be exactly the same without any future ramifications (not adding/subtracting versus add/subtracting). I couldn't find any guidance on the FTB website about this but this detail may be too "in the weeds" for the FTB.

I don't think the embedded quote is correct. In CA you copy over your Federal AGI to the CA 540 form, and the AGI includes interest earned on Treasury funds and bills since they are taxable by the Federal gov't. There is no addition done for these amounts on CA (540) California Adjustments, it is already baked into the Federal AGI.

Then you subtract these interest amounts from your CA income on line 2 of CA (540) California Adjustments by entering them in column B. See https://www.ftb.ca.gov/forms/2022/2022- ... tions.html for line 2

If your accountant never made this entry then you've been paying CA income tax on interest that should have been excluded from CA taxation.

[Artsdoctor]

You still have to report dividends from a Treasury fund, even though they're not taxable in CA. The dividends are added and then subtracted on Schedule CA (540) California Adjustments.

That's interesting. I didn't know that and I've never had an accountant do that. Treasury interest is not taxed at the local level so the tax implications would be exactly the same without any future ramifications (not adding/subtracting versus add/subtracting). I couldn't find any guidance on the FTB website about this but this detail may be too "in the weeds" for the FTB.

I don't think the embedded quote is correct. In CA you copy over your Federal AGI to the CA 540 form, and the AGI includes interest earned on Treasury funds and bills since they are taxable by the Federal gov't. There is no addition done for these amounts on CA (540) California Adjustments, it is already baked into the Federal AGI.

Then you subtract these interest amounts from your CA income on line 2 of CA (540) California Adjustments by entering them in column B. See https://www.ftb.ca.gov/forms/2022/2022- ... tions.html for line 2

If your accountant never made this entry then you've been paying CA income tax on interest that should have been excluded from CA taxation.

No, the reference is to the HSA only. In the HSA, if you've been buying treasuries, all of the interest is exempt from state. It's not entered on the federal tax form because the HSA is not a federally taxed entity. On the CA form, I have never entered any income associated with treasuries held in the HSA because they're not taxed. The comment above suggested that I should enter the treasury income (in the HSA, on the CA tax form) and then take it away. (At least, that's the way I'm interpreting the comment since it's in an HSA thread.)

[Yvy]

Forgive me for asking another question. I thought HDA was triple tax free as long as used just for healthcare expenses. I saw some replies stating selling invested stocks from HSA and dividends would trigger taxes?

[CFM300]

Forgive me for asking another question. I thought HDA was triple tax free as long as used just for healthcare expenses. I saw some replies stating selling invested stocks from HSA and dividends would trigger taxes?

HSAs are not recognized by the Republic of California. In California, when you sell inside an HSA, you pay tax on the capital gains (if any) associated with what you're selling. So prior to moving to CA (the topic of this thread), it's best to clear the existing capital gains currently inside your HSA. Otherwise, you're just increasing the amount of gains on which you'll pay taxes when you sell in CA. (You clear the gains inside your HSA by selling and reinvesting *inside* the HSA, not by selling and making withdrawals.)

[illumination]

I've heard this before, and it's a great idea. Just buy Berkshire Hathaway. Unless you sell shares, zero gains to report.

[CFM300]

You still have to report dividends from a Treasury fund, even though they're not taxable in CA. The dividends are added and then subtracted on Schedule CA (540) California Adjustments.

I don't think [that's] correct. In CA you copy over your Federal AGI to the CA 540 form, and the AGI includes interest earned on Treasury funds and bills since they are taxable by the Federal gov't. There is no addition done for these amounts on CA (540) California Adjustments, it is already baked into the Federal AGI.

As Artsdoctor explained, dividends inside an HSA do not appear on your federal form and thus are not carried over to CA 540. You have to add them on Part II, line 3b, column C. Then, some portion of them (which may or may not be 100%) are subtracted on line 2b, column B.

[CFM300]

On the CA form, I have never entered any income associated with treasuries held in the HSA because they're not taxed. The comment above suggested that I should enter the treasury income (in the HSA, on the CA tax form) and then take it away.

I hold Fidelity's Intermediate Treasury Index fund, FUAMX. In 2022, 99.58% of dividend income was from U.S. government securities. But in 2021, it was just 93.63%. So for me, there's always a slight difference between the amount I add on CA 540 and the amount I subtract. Thus, I owe some small tax on the dividends.

So while using FUAMX mostly solves the tax problem, it doesn't solve the reporting or tracking problems.

[exodusNH]

I've heard this before, and it's a great idea. Just buy Berkshire Hathaway. Unless you sell shares, zero gains to report.

This is a terrible idea. A single company, even a conglomerate, it not a suitable replacement for a diversified fund. GE was once held in the same regard.