HSA taxation in Calif

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hoops777
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HSA taxation in Calif

Post by hoops777 » Tue Oct 17, 2017 9:46 am

A little confused on this issue.So if I have 30,000 in an HSA and withdraw 5000 to pay medical expenses in 2018,is the entire 5000 taxable for state tax or just any gains?
K.I.S.S........so easy to say so difficult to do.

TIAX
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Re: HSA taxation in Calif

Post by TIAX » Tue Oct 17, 2017 9:46 am

hoops777 wrote:
Tue Oct 17, 2017 9:46 am
A little confused on this issue.So if I have 30,000 in an HSA and withdraw 5000 to pay medical expenses in 2018,is the entire 5000 taxable for state tax or just any gains?
Just the gains.

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CAsage
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Re: HSA taxation in Calif

Post by CAsage » Tue Oct 17, 2017 9:55 am

I think any interest is also taxable annually, whether or not you withdraw it. Your custodian will send any needed 1099-Int or B or Div (I only ever got the first one...).
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

hoops777
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Re: HSA taxation in Calif

Post by hoops777 » Tue Oct 17, 2017 10:00 am

Thanks.That is good news.I was thinking the entire withdrawal was taxable which did not really make any sense. :D
K.I.S.S........so easy to say so difficult to do.

ofckrupke
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Re: HSA taxation in Calif

Post by ofckrupke » Tue Oct 17, 2017 11:31 am

CAsage wrote:
Tue Oct 17, 2017 9:55 am
Your custodian will send any needed 1099-Int or B or Div (I only ever got the first one...).
Really? AFAIK only annual 5498-SA for contributions and 1099-SA for distributions are reportable by the HSA provider to the federal government, so CA holders of HSAs should not expect "mock" 1099-Int/B/Div from the provider, and must themselves keep track of (typically reinvested so retained in account) CA-taxable interest & dividends from HSA holdings for annual reporting on form 540(via schedule 540CA)...as well as a running ledger(spreadsheet) of the various purchase lots (in the same fashion as for non-covered shares in federally taxable accounts) for CA capital gain/loss accounting on schedule D(540).
Last edited by ofckrupke on Tue Oct 17, 2017 11:39 am, edited 1 time in total.

Spirit Rider
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Re: HSA taxation in Calif

Post by Spirit Rider » Tue Oct 17, 2017 11:34 am

CAsage wrote:
Tue Oct 17, 2017 9:55 am
I think any interest is also taxable annually, whether or not you withdraw it. Your custodian will send any needed 1099-Int or B or Div (I only ever got the first one...).
Are you sure? Have you received such a form for an HSA account? I'm not sure how that would be possible.

Forms 1099-INT, 1099-B and 1099-DIV are federal forms only issued for taxable accounts. An HSA is not a federally taxable account.

An HSA custodian only reports on Forms 1099-SA and 5498-SA. There is no report of earnings on either of those forms.

That is in fact why HSA state tax filing in CA can be a little tricky to get the data.

SpaceCowboy
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Re: HSA taxation in Calif

Post by SpaceCowboy » Tue Oct 17, 2017 11:38 am

I don't get any special forms reporting distributions just because I'm a California resident. It's totally on the honor system. The custodian makes no special report to the CA FTB.

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CAsage
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Re: HSA taxation in Calif

Post by CAsage » Tue Oct 17, 2017 11:50 am

Spirit Rider wrote:
Tue Oct 17, 2017 11:34 am
CAsage wrote:
Tue Oct 17, 2017 9:55 am
I think any interest is also taxable annually, whether or not you withdraw it. Your custodian will send any needed 1099-Int or B or Div (I only ever got the first one...).
Are you sure? Have you received such a form for an HSA account? I'm not sure how that would be possible. Forms 1099-INT, 1099-B and 1099-DIV are federal forms only issued for taxable accounts. An HSA is not a federally taxable account...
That is in fact why HSA state tax filing in CA can be a little tricky to get the data.
Ouch! Good thing this is a friendly forum! Nope, I was clearly mistaken and answering without that first cup of coffee. I did NOT get an interest statement from Alliant Credit Union for my HSA, just -SA forms. I thought I did, but I misremembered. Well, ok, so you still have to report the interest, but not pay taxes on the qualified withdrawal. I'm a bit surprised, really, since that does make it a lot harder to manage. Sure wish I had known about that honor factor earlier.... I was so honest!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Spirit Rider
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Re: HSA taxation in Calif

Post by Spirit Rider » Tue Oct 17, 2017 12:53 pm

Well, they do get your 5498-SA which shows this year's contributions and the end-of-year FMV of the account. If they compare that to the previous year it will show the net gain in the account.

Now, I don't know what degree of automated matching the CA FTB has, but you would think the presence of all that hi-tech, they must have some. Unless you exclusively own CA munis, treasuries and/or Berkshire Hathaway in your HSA, they could certainly surmise that with a large HSA balance/gain, some of that must be interest, dividends and/or capital gains.

If I would worked in compliance enforcement at the FTB, I would at least be randomly selecting some high dollar value HSAs for some inquiries.

Easy Rhino
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Re: HSA taxation in Calif

Post by Easy Rhino » Tue Oct 17, 2017 2:07 pm

As others have mentioned, it's basically honor system, because your custodian isn't going to send you a nice 1099-anything.

I save my year end HSA statement in my big tax folder. (this reminded me I need to add last years! (I only just finished my extension))

Treat the taxes, from the state perspective, as if you just had a taxable brokerage account. You still have to pay capital gains and dividend/interest taxes.

Additionally, the invested part of my HSA I have invested in TIPS fund and the sweep fund is in federal money market, so at least the income is state tax free, and I only have to worry about the cap gains (And I don't reinvest dividends or cap gains automatically, to keep it simpler).

ofckrupke
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Re: HSA taxation in Calif

Post by ofckrupke » Tue Oct 17, 2017 2:14 pm

I let payroll contributions[1] accumulate in the interest-bearing sub-account to reduce the number of CA tax lots, and also time the share purchases to coincide with the TIPS fund's quarterly income distribution (reinvestment is automatic/forced at HealthEquity) to reduce the count of tax lots on a ledger kept solely for CA tax reporting.
But if I held any funds whose dividends were CA-taxable in the HSA, for these I'd instead want to explicitly avoid buying shares with new money on dividend reinvestment dates, because HealthEquity doesn't explicitly list the payment and reinvestment of the dividend; the details must be inferred from the change in # of shares before and after [2]. So creating distinct tax lots for these two forms of accumulation would actually be more useful for tax records.

With HealthEquity in CA, also need to avoid the pitfall wherein one reduces the interest-bearing sub-account to the $2k minimum with a fund purchase, only to have the next debit for the 0.033% monthly fee on mutual fund AUM be drawn before the next periodic payroll addition, thus forcing a small automated liquidation from the mutual fund(s) that then needs to be documented on the CA-specific tax-lot ledger(s).

[1] employer's software won't allow calendar front loading of employee HSA contributions. Can back load (all in December), but employer seed contributions are evenly distributed. Otherwise we'd be tempted to back-load to keep most of the money in even larger tax lots.

[2] happily, when we did we did not stack a new purchase atop a div reinvestment, the amount reinvested concorded with VIPIX's distribution record at the Vanguard site. That is: although HealthEquity makes the dividend reinvestment non-transparent, they don't appear to be cutting themselves a slice on the sly.

mervinj7
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Re: HSA taxation in Calif

Post by mervinj7 » Tue Oct 17, 2017 6:16 pm

Easy Rhino wrote:
Tue Oct 17, 2017 2:07 pm
Additionally, the invested part of my HSA I have invested in TIPS fund and the sweep fund is in federal money market, so at least the income is state tax free, and I only have to worry about the cap gains (And I don't reinvest dividends or cap gains automatically, to keep it simpler).
Since our HSA is managed by Fidelity, does anybody have any recommendations for good Fidelity TIPS fund that has no transaction fees? We also live in CA and just want to minimize any overhead (e.g. keeping track of all distributions manually in order to file CA taxes) with this HSA.
We were looking at this option: FSIYX (Fidelity® Inflation-Protected Bond Index Fund)

ryman554
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Re: HSA taxation in Calif

Post by ryman554 » Wed Oct 18, 2017 9:42 am

mervinj7 wrote:
Tue Oct 17, 2017 6:16 pm
Easy Rhino wrote:
Tue Oct 17, 2017 2:07 pm
Additionally, the invested part of my HSA I have invested in TIPS fund and the sweep fund is in federal money market, so at least the income is state tax free, and I only have to worry about the cap gains (And I don't reinvest dividends or cap gains automatically, to keep it simpler).
Since our HSA is managed by Fidelity, does anybody have any recommendations for good Fidelity TIPS fund that has no transaction fees? We also live in CA and just want to minimize any overhead (e.g. keeping track of all distributions manually in order to file CA taxes) with this HSA.
We were looking at this option: FSIYX (Fidelity® Inflation-Protected Bond Index Fund)
Didn't you just answer your own question? Low cost. Free to buy and sell (there is a minimum holding person, i believe) Treasuries. All check. It's what I do to make things "simple".

mervinj7
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Re: HSA taxation in Calif

Post by mervinj7 » Wed Oct 18, 2017 11:30 am

ryman554 wrote:
Wed Oct 18, 2017 9:42 am
mervinj7 wrote:
Tue Oct 17, 2017 6:16 pm
Since our HSA is managed by Fidelity, does anybody have any recommendations for good Fidelity TIPS fund that has no transaction fees? We also live in CA and just want to minimize any overhead (e.g. keeping track of all distributions manually in order to file CA taxes) with this HSA.
We were looking at this option: FSIYX (Fidelity® Inflation-Protected Bond Index Fund)
Didn't you just answer your own question? Low cost. Free to buy and sell (there is a minimum holding person, i believe) Treasuries. All check. It's what I do to make things "simple".
The other option I was looking at was the iShares TIPS Bond ETF(TIP, ER=0.20%). I just realized that for the above fund, I don't meet the 10k minimum, so I would have to buy the Investor version, FSIQX, which has a slightly larger ER at 0.19%.

ryman554
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Re: HSA taxation in Calif

Post by ryman554 » Wed Oct 18, 2017 11:50 am

mervinj7 wrote:
Wed Oct 18, 2017 11:30 am

The other option I was looking at was the iShares TIPS Bond ETF(TIP, ER=0.20%). I just realized that for the above fund, I don't meet the 10k minimum, so I would have to buy the Investor version, FSIQX, which has a slightly larger ER at 0.19%.
Don't think about it too hard.

I do strongly suggest you keep one year's worth of deductible/out of pocket maximum in CASH if you are using the HSA to cash-flow yearly medical expenses to avoid frequent trading penalties. If you're considering TIPS, that is what you are likely doing. I suppose that is where the ETF comes in handy.

If you're investing for 20-30 years out, you'll want growth above inflation, so just choose some ETF/fund that is tax efficient and only reinvest dividend/cap gains on Jan 1 so you know how much you will have to report to CA. And then move to any of the other 48 states when you get money out.

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grabiner
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Re: HSA taxation in Calif

Post by grabiner » Fri Oct 20, 2017 10:20 pm

Easy Rhino wrote:
Tue Oct 17, 2017 2:07 pm
Additionally, the invested part of my HSA I have invested in TIPS fund and the sweep fund is in federal money market, so at least the income is state tax free, and I only have to worry about the cap gains (And I don't reinvest dividends or cap gains automatically, to keep it simpler).
Federal Money Market is not state tax exempt; you need to use Treasury Money Market (which Vanguard doesn't allow as a sweep account).
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Slacker
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Re: HSA taxation in Calif

Post by Slacker » Fri Oct 20, 2017 10:40 pm

I'm glad to read this information, but boy the more I read, the more difficult it is to want to pull the trigger on moving to SoCal. Taxing HSA gains used for medical purposes is just ridiculous.

AlphaLess
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Re: HSA taxation in Calif

Post by AlphaLess » Fri Oct 20, 2017 10:45 pm

Spirit Rider wrote:
Tue Oct 17, 2017 11:34 am
CAsage wrote:
Tue Oct 17, 2017 9:55 am
I think any interest is also taxable annually, whether or not you withdraw it. Your custodian will send any needed 1099-Int or B or Div (I only ever got the first one...).
Are you sure? Have you received such a form for an HSA account? I'm not sure how that would be possible.

Forms 1099-INT, 1099-B and 1099-DIV are federal forms only issued for taxable accounts. An HSA is not a federally taxable account.

An HSA custodian only reports on Forms 1099-SA and 5498-SA. There is no report of earnings on either of those forms.

That is in fact why HSA state tax filing in CA can be a little tricky to get the data.
I am not about to argue about California law (about which I know nothing).
But when there are no records of gains, there are no gains.
Say, in your HSA account, you own an index fund which pays no dividends.
Sure, it grows in value, but I fail to see the gains.
"You can get more with a kind word and a gun than with just a kind word." George Washington

mega317
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Re: HSA taxation in Calif

Post by mega317 » Fri Oct 20, 2017 11:03 pm

AlphaLess wrote:
Fri Oct 20, 2017 10:45 pm
Sure, it grows in value, but I fail to see the gains.
Huh?
If you contribute $1,000 and later have $2,000, then you have $1,000 in gains.
Slacker wrote:
Fri Oct 20, 2017 10:40 pm
I'm glad to read this information, but boy the more I read, the more difficult it is to want to pull the trigger on moving to SoCal. Taxing HSA gains used for medical purposes is just ridiculous.
I can't see how this would be the deciding factor for someone considering living in California. Where would you be coming from? Read this again in February!

AlphaLess
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Re: HSA taxation in Calif

Post by AlphaLess » Fri Oct 20, 2017 11:10 pm

mega317 wrote:
Fri Oct 20, 2017 11:03 pm
AlphaLess wrote:
Fri Oct 20, 2017 10:45 pm
Sure, it grows in value, but I fail to see the gains.
Huh?
If you contribute $1,000 and later have $2,000, then you have $1,000 in gains.
No, you don't.

You only have $1000 in gains when you sell the thing.
"You can get more with a kind word and a gun than with just a kind word." George Washington

Slacker
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Re: HSA taxation in Calif

Post by Slacker » Sun Oct 22, 2017 12:25 am

mega317 wrote:
Fri Oct 20, 2017 11:03 pm
Slacker wrote:
Fri Oct 20, 2017 10:40 pm
I'm glad to read this information, but boy the more I read, the more difficult it is to want to pull the trigger on moving to SoCal. Taxing HSA gains used for medical purposes is just ridiculous.
I can't see how this would be the deciding factor for someone considering living in California. Where would you be coming from? Read this again in February!
Of course it isn't the deciding factor, just another annoyance for me. I'll be cashing out some ETFs pre-move to buik up the HSA with more cash and we'll also try to do any non-covered medical before moving if we can. Just feel like everytime I turn around another little cost will be added on as we get nickeled and dimed to death. At least the housing in Los Angeles isn't as expensive as I feared - about similar to DC where we also lived previously.

In February, it will probably be about 75 and sunny in Phoenix so February probably won't make much of a difference to me, weather wise :D . I plan to be mountain biking the heck out of South Mountain around that time.

danaht
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Re: HSA taxation in Calif

Post by danaht » Sun Oct 22, 2017 8:31 am

If I ever decide to move to CA or another state that does not recognize HSA accounts - I hope I can do one thing the year before the move: Sell all my ETF positions in my HSA with capital gains and re-buy the same or similar ETFs. This way the HSA capital gains would be locked in with the previous state that recognized the HSA account.

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