California doesn't conform with federal provisions for HSAs. It looks like they're taxing an MSA-to-HSA rollover twice:
- income tax (schedule CA line 21) - additional tax (form
3805P line 10) Is this correct? :-(
It's considered a non-medical distribution by Calfornia. If those are taxed twice, then so is the conversion. Of course, amounts paid out of the HSA are deductible medical expenses for California, rather than being disregarded.
Unfortunately, it may be. I don't see why they don't consider the rollover as a "qualified distribution" because rollovers between MSAs are allowed in the federal laws that they accepted. [Granted, this is an MSA to HSA rollover, but is there a reason why you think they shouldn't treat your HSA as a rolled-over-to-MSA for state income tax purposes?] Federal law says you CAN do it. See the 10th Amendment. I think that if you have to fight this through, California is going to get screwed here.
The 3805P is CA's equivalent (2.5%) to the federal Form 5329
10% early distribution penalty.-- Alan
Thanks. Your reply gave me a moment of hope.
However, it appears only medical expenses that exceed 7.5% of federal AGI are deductible on a California return, just like on a federal return. (Form CA line 37 uses federal schedule A line 4, not federal schedule A line 1.) Because of the 7.5% threshold, the HSA-distributed medical expenses don't help me. Am I correct that the 7.5% threshold applies to the California return in this case? If not, where would I report the HSA-distributed medical expenses on the California return?
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