taxes on HSA dividends in NJ?

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vtkb
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taxes on HSA dividends in NJ?

Post by vtkb »

Hi I use an HSA as an investment tool, but live in NJ. For NJ taxes I know I can not deduct the 3350 I placed in my HSA last year like I can for my federal taxes. I invested the money and last year saw a 25 dollar dividend reinvested automatically. Do I need to report this 25 dollar dividend on my NJ taxes? Or is it only reported once I sell the lots and start drawing money from my HSA to reimburse expenses (which I dont plan on doing for many years).

Thanks,
Billy
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Artsdoctor
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Re: taxes on HSA dividends in NJ?

Post by Artsdoctor »

You need to declare it.
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grabiner
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Re: taxes on HSA dividends in NJ?

Post by grabiner »

Under NJ law, an HSA is treated the same as any other bank or brokerage account. You must pay tax on interest, dividends, and capital gains unless they are exempt from NJ tax.

Thus, if your HSA offers a TIPS or other Treasury bond fund, that is often a good choice in NJ. NJ doesn't tax interest on Treasury bonds, nor even capital gains on NJ "qualified investment funds" (funds which hold securities exempt from NJ tax).
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vtkb
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Re: taxes on HSA dividends in NJ?

Post by vtkb »

would I then also be able to deduct (on NJ taxes) the monthly account fees that come with the investment platform from my HSA? They can offset my dividends earned to a net of 0 if I can.

thanks
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Re: taxes on HSA dividends in NJ?

Post by Artsdoctor »

vtkb wrote:would I then also be able to deduct (on NJ taxes) the monthly account fees that come with the investment platform from my HSA? They can offset my dividends earned to a net of 0 if I can.

thanks
I can't comment on a threshold or on the ability to deduct investment expenses on your NJ return. I would not be able to do that on my CA return.

I'd be surprised if your account fees are greater than your dividends. What I do is this: My quarterly fees are removed with shares of my fund (I use Vanguard Balanced Fund); I use specific lot ID for my capital gains/losses calculations, so I make sure that those shares which are removed from the account have the lowest cost basis. By doing that, I ultimately reduce my gain when I decide to sell shares in the future (when I would be selling shares with the highest cost basis). My fees are very small so this is really more of an exercise in bookkeeping. However, every little bit helps, as they say.
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Re: taxes on HSA dividends in NJ?

Post by Bob Alou »

How would you report dividend or interest income in the absence of a1099? Wouldn't that cause a mismatch with the state since the custodian is not reporting a similar amount?
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Re: taxes on HSA dividends in NJ?

Post by grabiner »

Bob Alou wrote:How would you report dividend or interest income in the absence of a1099? Wouldn't that cause a mismatch with the state since the custodian is not reporting a similar amount?
The tax agencies don't object if you report more income than was reported on your 1099 forms, as this is a common situation (foreign account, interest was less than $10 and no 1099 was filed, interest paid by an individual who did not give you a 1099). They will only object if income which was reported to them did not appear on your tax form.
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Re: taxes on HSA dividends in NJ?

Post by abuss368 »

grabiner wrote:Under NJ law, an HSA is treated the same as any other bank or brokerage account. You must pay tax on interest, dividends, and capital gains unless they are exempt from NJ tax.

Thus, if your HSA offers a TIPS or other Treasury bond fund, that is often a good choice in NJ. NJ doesn't tax interest on Treasury bonds, nor even capital gains on NJ "qualified investment funds" (funds which hold securities exempt from NJ tax).
Hi David -

Thank you for that very informative explanation regarding the State of New Jersey.

Best.
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vtkb
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Re: taxes on HSA dividends in NJ?

Post by vtkb »

Artsdoctor wrote:
vtkb wrote:would I then also be able to deduct (on NJ taxes) the monthly account fees that come with the investment platform from my HSA? They can offset my dividends earned to a net of 0 if I can.

thanks
I can't comment on a threshold or on the ability to deduct investment expenses on your NJ return. I would not be able to do that on my CA return.

I'd be surprised if your account fees are greater than your dividends. What I do is this: My quarterly fees are removed with shares of my fund (I use Vanguard Balanced Fund); I use specific lot ID for my capital gains/losses calculations, so I make sure that those shares which are removed from the account have the lowest cost basis. By doing that, I ultimately reduce my gain when I decide to sell shares in the future (when I would be selling shares with the highest cost basis). My fees are very small so this is really more of an exercise in bookkeeping. However, every little bit helps, as they say.

I use Vanguard Total Stock Market so the dividends are low (figured tax advantaged for NJ if needed to pay tax which I now understand I do); my monthly fees are 3 dollars/month taken out automatically from my investments. I have to look into if I can use specific lot ID for the investment fees, although I dont plan on selling for many years and wonder how much of a gain it would be for tax lost harvesting relative to the hassle of tracking it. Thanks for the advice!
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Re: taxes on HSA dividends in NJ?

Post by Artsdoctor »

vtkb wrote:
Artsdoctor wrote:
vtkb wrote:would I then also be able to deduct (on NJ taxes) the monthly account fees that come with the investment platform from my HSA? They can offset my dividends earned to a net of 0 if I can.

thanks
I can't comment on a threshold or on the ability to deduct investment expenses on your NJ return. I would not be able to do that on my CA return.

I'd be surprised if your account fees are greater than your dividends. What I do is this: My quarterly fees are removed with shares of my fund (I use Vanguard Balanced Fund); I use specific lot ID for my capital gains/losses calculations, so I make sure that those shares which are removed from the account have the lowest cost basis. By doing that, I ultimately reduce my gain when I decide to sell shares in the future (when I would be selling shares with the highest cost basis). My fees are very small so this is really more of an exercise in bookkeeping. However, every little bit helps, as they say.

I use Vanguard Total Stock Market so the dividends are low (figured tax advantaged for NJ if needed to pay tax which I now understand I do); my monthly fees are 3 dollars/month taken out automatically from my investments. I have to look into if I can use specific lot ID for the investment fees, although I dont plan on selling for many years and wonder how much of a gain it would be for tax lost harvesting relative to the hassle of tracking it. Thanks for the advice!
It is true that bookkeeping can sometimes get the better of you. However, if you're using a software program, it's really not that big of a deal. If it's going to be many, many years, costs do matter in the end. And don't forget, when it comes time to sell, you're going to most likely not be selling all at once. At that time, you may be selling a few thousand dollars at a time so specific lot ID may work to your advantage in calculating your capital gains. Your HSA carrier will not help you with this so you're pretty much on your own when it comes to recordkeeping.

Don't forget to know your state tax laws. There are idiosyncrasies in each state so what I offer from a CA point of view may not apply in NJ (for example, I can carryover losses from year to year and you cannot, from what I understand).
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Re: taxes on HSA dividends in NJ?

Post by nolesrule »

Is MS Money Sunset Edition good enough to handle the book-keeping?

I'm one of those New Jersey people and am approaching the point where we're going to start investing HSA money.
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Re: taxes on HSA dividends in NJ?

Post by vtkb »

In case anyone wanted a follow up (a few years later), I decided to invest my NJ HSA in treasury funds as part of my overall bond allocation. This way, no taxes- none in federal (bc HSA), none in NJ (bc treasury funds). Simplicity was worth it.
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Re: taxes on HSA dividends in NJ?

Post by abuss368 »

grabiner wrote: Sun Mar 05, 2017 8:19 pm Under NJ law, an HSA is treated the same as any other bank or brokerage account. You must pay tax on interest, dividends, and capital gains unless they are exempt from NJ tax.

Thus, if your HSA offers a TIPS or other Treasury bond fund, that is often a good choice in NJ. NJ doesn't tax interest on Treasury bonds, nor even capital gains on NJ "qualified investment funds" (funds which hold securities exempt from NJ tax).
Hi David -

I did not know New Jersey (our neighboring state) taxes income from HSAs. Thanks for sharing. If I recall you previously lived there correct?

Tony
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Re: taxes on HSA dividends in NJ?

Post by grabiner »

abuss368 wrote: Sat Feb 27, 2021 9:33 am
grabiner wrote: Sun Mar 05, 2017 8:19 pm Under NJ law, an HSA is treated the same as any other bank or brokerage account. You must pay tax on interest, dividends, and capital gains unless they are exempt from NJ tax.

Thus, if your HSA offers a TIPS or other Treasury bond fund, that is often a good choice in NJ. NJ doesn't tax interest on Treasury bonds, nor even capital gains on NJ "qualified investment funds" (funds which hold securities exempt from NJ tax).
I did not know New Jersey (our neighboring state) taxes income from HSAs. Thanks for sharing. If I recall you previously lived there correct?
Yes. I lived in NJ from 2010-2013. My tax software didn't ask about income within the HSA, so I would have underpaid my state tax if I didn't know the law. Even when I did know the law, I had to override the calculations in TaxACT and could not file electronically; this was fixed in 2014. CA is the only other state which does not recognize HSAs, but tax software handles this better.
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Re: taxes on HSA dividends in NJ?

Post by abuss368 »

grabiner wrote: Sat Feb 27, 2021 9:38 am
abuss368 wrote: Sat Feb 27, 2021 9:33 am
grabiner wrote: Sun Mar 05, 2017 8:19 pm Under NJ law, an HSA is treated the same as any other bank or brokerage account. You must pay tax on interest, dividends, and capital gains unless they are exempt from NJ tax.

Thus, if your HSA offers a TIPS or other Treasury bond fund, that is often a good choice in NJ. NJ doesn't tax interest on Treasury bonds, nor even capital gains on NJ "qualified investment funds" (funds which hold securities exempt from NJ tax).
I did not know New Jersey (our neighboring state) taxes income from HSAs. Thanks for sharing. If I recall you previously lived there correct?
Yes. I lived in NJ from 2010-2013. My tax software didn't ask about income within the HSA, so I would have underpaid my state tax if I didn't know the law. Even when I did know the law, I had to override the calculations in TaxACT and could not file electronically; this was fixed in 2014. CA is the only other state which does not recognize HSAs, but tax software handles this better.
Interesting. Thank you for sharing.

Tony
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Re: taxes on HSA dividends in NJ?

Post by seawolf21 »

Bob Alou wrote: Mon Mar 13, 2017 12:00 pm How would you report dividend or interest income in the absence of a1099? Wouldn't that cause a mismatch with the state since the custodian is not reporting a similar amount?
As grabiner, indicated, this only causes an issue if you under report.

As for HSA, practically speaking, many taxpayers are NOT going to know it needs to be reported because:
1.) HSAs are not even mentioned in the instructions for NJ-1040.
2.) This is not even reported on a 1099. As a result, NJ would not know these gains/dividends even exist.

IMO, not reporting HSA gains/dividends would only come up if you got audited by NJ for a different reason.
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Re: taxes on HSA dividends in NJ?

Post by JackoC »

seawolf21 wrote: Sat Feb 27, 2021 10:30 am
Bob Alou wrote: Mon Mar 13, 2017 12:00 pm How would you report dividend or interest income in the absence of a1099? Wouldn't that cause a mismatch with the state since the custodian is not reporting a similar amount?
As grabiner, indicated, this only causes an issue if you under report.

As for HSA, practically speaking, many taxpayers are NOT going to know it needs to be reported because:
1.) HSAs are not even mentioned in the instructions for NJ-1040.
2.) This is not even reported on a 1099. As a result, NJ would not know these gains/dividends even exist.

IMO, not reporting HSA gains/dividends would only come up if you got audited by NJ for a different reason.
Yes unfortunately I read on BH forum good arguments for reporting this (not explicitly stated in NJ-1040 instructions but I'm now convinced). So I feel obligated now to figure out the interest and report it, starting in 2020 tax year (my standard approach is not to file revised returns for past minor errors). Ignorance can be bliss on very minor points like this (I believe my NJ tax will rise ~$20 on a total unfortunately vastly greater). If you really didn't know about this and never caught on, you'd be better off. Even if they found it in an audit, I believe they'd be highly likely to just charge you the minor amount of tax with interest not give you the death penalty, probably not any penalty. And I don't think the chance of them detecting it even in an audit would be that high. But now I know I'm supposed to, so will. :happy
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Re: taxes on HSA dividends in NJ?

Post by vtkb »

It it makes you feel better, I dont think NJ tax dept actually knows what to do with it. When I exchanged my holdings for treasure funds my CPA emailed the NJ tax division to ask how to proceed with the gains. He got back an answer of NJ will tax income if contributed to an HSA i.e. your AGI for NJ is higher than the federal one. They wrote nothing about the gains even though that's what we asked about. Honestly I don't think they counted on many people using it as a saving/investment vehicle instead of using the funds for medical expenses the same year they contribute to the HSA. But I'm glad @grabiner? answered our questions at that time.
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Re: taxes on HSA dividends in NJ?

Post by seawolf21 »

JackoC wrote: Sat Feb 27, 2021 11:28 am
seawolf21 wrote: Sat Feb 27, 2021 10:30 am
Bob Alou wrote: Mon Mar 13, 2017 12:00 pm How would you report dividend or interest income in the absence of a1099? Wouldn't that cause a mismatch with the state since the custodian is not reporting a similar amount?
As grabiner, indicated, this only causes an issue if you under report.

As for HSA, practically speaking, many taxpayers are NOT going to know it needs to be reported because:
1.) HSAs are not even mentioned in the instructions for NJ-1040.
2.) This is not even reported on a 1099. As a result, NJ would not know these gains/dividends even exist.

IMO, not reporting HSA gains/dividends would only come up if you got audited by NJ for a different reason.
Yes unfortunately I read on BH forum good arguments for reporting this (not explicitly stated in NJ-1040 instructions but I'm now convinced). So I feel obligated now to figure out the interest and report it, starting in 2020 tax year (my standard approach is not to file revised returns for past minor errors). Ignorance can be bliss on very minor points like this (I believe my NJ tax will rise ~$20 on a total unfortunately vastly greater). If you really didn't know about this and never caught on, you'd be better off. Even if they found it in an audit, I believe they'd be highly likely to just charge you the minor amount of tax with interest not give you the death penalty, probably not any penalty. And I don't think the chance of them detecting it even in an audit would be that high. But now I know I'm supposed to, so will. :happy
+1. Now that you know what the law is, you can’t claim ignorance. Should have never opened this thread. Lol
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