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 2018 tax year, the following states had HSA tax laws that differed with the federal HSA tax laws: California and New Jersey.
California and New Jersey do not offer tax-free contributions at the state level. Additionally, these states regard HSAs as regular taxable brokerage accounts. Thus, residents have to declare any capital gains, interest and dividends they 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).
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.
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, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Lets take a look at which states provide the greatest tax savings for HSA contributions. The split bars chart below shows the state tax savings for individuals in all 50 states. We assumed the individual filed single and made an HSA contribution of $3,450 in 2018. We also calculated the tax savings for individuals earning 25K and 100K.