State Taxation of HSAs
Most state tax laws align with federal laws in regards to HSAs, with some exceptions. As of the end of the 2017 tax year, the following states had HSA tax laws that differed with the federal HSA tax laws: California and New Jersey.
Eligible HSA contributions are taxed by these states. Additionally, in these states HSAs are regarded as regular taxable brokerage accounts. So, you have to declare any capital gains, interest and dividends you receive to the state.
New Hampshire and Tennessee only tax dividend and interest earnings after a certain dollar amount, depending on whether you’re filing individually or married filing jointly. That dollar amount is the limit for all of that year’s dividend and interest earnings, not just what came from your HSA. In Tennessee, residents must only file dividend and earnings income tax returns if they collect dividend and interest income for that year totaling more than $1,250 (if filing individually) or $2,500 (if married filing jointly). In New Hampshire, residents must only file dividend and earnings income tax returns if they collect dividend and interest income for that year totaling more than $2,400 (if filing individually) or $4,800 (if married filing jointly).
While we are on the subject of HSA taxation at the state level, it's worth mentioning that states with no income tax fail to provide a tangible STATE tax deduction for HSA contributions. Thus, residents in the following states receive no state tax deduction for contributing to an HSA: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
Often times your state’s tax laws regarding HSAs will be explicit in the form you file when you file your state taxes. We strongly recommend consulting your tax advisor on whether interest or investment gains/losses have special provisions in your state.