If you’re not already familiar with the benefits of Health Savings Accounts (HSAs), you can read about them here.
These accounts, which have been around since 2003, are great tools for tax-deferred growth and their popularity is growing. HSAs are expected to overtake Flexible Spending Accounts (FSAs) as the most-used health benefit account by the end of this year.
However, if you live in New Jersey or California, the picture isn’t quite as rosy. Neither state recognizes HSAs, which means your contributions to an HSA are taxable at the state level.
In California, if your employer puts money in your HSA, you’ll have to pay taxes on those contributions as well. In both states, people who have their own HSA (in other words, not funded through their employer) may have to adjust their federal adjusted gross income (AGI) on their state tax return.
But wait, there’s more!
In California, investment earnings within an HSA are also taxable. If you live in the Golden State, you’ll have to report all interest, dividends, and capital gains on investments earned in your HSA.
And here’s the clincher: you’ll need to track those numbers manually in order to report them on your tax return. This can get complicated and requires organization and attention to detail.
How to Simplify Accounting
Some experts suggest investing your HSA in a target date fund rather than actively trading between multiple investments. The fewer investments you own in your HSA (and the less frequently you buy and sell them), the easier it will be to manually calculate earnings and capital gains at tax time.
Another idea is to allow all interest and dividend income to accrue as throughout the year instead of reinvesting automatically. You can then reinvest that cash in the following year.
If you’re not sure how much you may owe in state taxes on your HSA, a financial advisor can help. Click here to request a complimentary, no-obligation conversation with one of our advisors today!