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: Alabama, 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 tax interest and dividends only when a certain dollar amount is reached from these income sources. In Tennessee, residents must only file income tax returns if they collect dividend and interest income totaling more than $1,250 for the year, or $2,500 if they're married and filing a joint return. New Hampshire only requires that residents file a tax return when they have interest and dividend income in excess of $2,400, or $4,800 if they're married and 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.