Health Savings Accounts
I have many clients with Health Savings Accounts. I know they get a federal tax deduction for contributions; earnings grow tax-deferred and distributions are tax-free for qualified medical expenses (at the federal level).
Currently California does not honor the deduction, so HSA contributions are an addition to income at the state level on the CA tax return. If the money inside the HSA is invested and generating, interest, dividends and capital gains in the account every year, does that portfolio income from the HSA need to be reported on the CA state tax return every year whether or not there are any distributions out of the HSA?
Permalink Submitted by Alan - IRA critic on Tue, 2025-04-01 18:38
Yes. For CA state income tax purposes an HSA is just like a taxable brokerage account. Has been that way since HSAs were initially introduced in 2003. They probably never thought that these accounts would as popular as they are or that their decision would become such a blunder. NJ is another state with HSA exceptions to federal law.