State Taxes and HSAs

The federal government allows tax advantages HSAs; when you fill out your income tax returns you deduct contributions to the HSA and you don’t account for growth (or loss) in the HSA value.

But what about state income taxes? Most Americans live in states with state taxes and some even live in regions (municipalities) with city income taxes. The change in the federal tax code in 2005 that created HSAs also created a mismatch between state and federal taxes, making bookkeeping difficult for HSA holders.

The answer is: it depends on what state you live in. Most states now allow deductions. Indeed, this questions has become part of the debate about state-supported health care in California, which is one of the few states that does not allow deductions.


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