grabiner wrote:Thus, if you contributed to an HSA while a CA resident, and then made a non-qualified withdrawal while not a CA resident, you would pay state tax twice. Conversely, if you contributed to an HSA while a non-CA resident, and then made a non-qualified withdrawal while a CA resident, you would pay no state tax.
grabiner.....for OP's question could it also depend on the nature of the investment within the HSA? Ex: CDs......tax is paid every yr on the interest in CA; if non-qualified withdrawal is made in another state, the withdrawal is taxed for 2x taxation?
Each state imposes taxes according to its own tax laws; whether you paid tax to another state or not is not normally a concern (with the exception that states allow you to take a credit for double taxes on the same income, but I don't think that applies here).
Ex: tax-efficient funds with no distributions: no taxation in CA (at least on distribution component); if non-qualified withdrawal is made in another state, the withdrawal is taxed for 1x taxation? Since no deduction for contribution in CA
and withdrawal for non-qualified expenses in another state would be taxed, this part (contribution)would be 2x taxation
so overall taxation would depend on ratio of gains to contribution? (between 1x and 2x).?
Yes, this is correct. For example, you contribute $5000 in CA and pay CA tax on that $5000. The $5000 then grows to $10,000 with no dividends and then you move to NY, where you take a non-qualified withdrawal. In both CA and NY, your state taxable income is based on your federal taxable income, adjusted for the state's tax laws; thus you owe NY tax on the full $10,000 withdrawal.
Now, consider the situation in the other direction, in which you contribute in NY and move to CA. You paid no tax on the $5000 contributed in NY. If you don't sell the stock, then when you sell the stock in CA, you have a $5000 CA capital gain, which is taxed whether you withdraw the money or not; if you sell the stock while still in NY, you have a $5000 non-taxable gain in NY because NY does not tax gains inside an HSA. And CA imposes no state tax on the non-qualified withdrawal, since under CA law, the HSA is an ordinary taxable account.
This situation also occurs in many other situations with different state tax laws that can carry over to subsequent years. For example, NJ does not allow a deduction for IRA contributions. Therefore, if you contribute $5000 to a federally deductible IRA in NJ, you get no state deduction. Then, if you withdraw the IRA in NY, you pay NY tax on the full amount, including the $5000 that you would have deducted from your NY taxes if you had filed NY taxes in the year you made the contribution.