We’ve discussed before how much of a benefit a Health Savings Account, or HSA, can be for saving money on your taxes. Contributions to an HSA are tax deductible for federal income tax purposes, or in the case of pre-tax contributions, they are simply not part of your income for federal income tax purposes. In addition, all interest, or capital gains earned within an HSA are tax-free, assuming all withdrawals are made to pay qualified medical expenses.But, what about state taxes on Health Savings Accounts?
State Taxes on HSA Accounts
The Federal Government can’t force states to do things, although there are ways around that, such as make your drinking age 21, or you get less federal highway funds. So, the various states don’t necessarily have to go along with the Feds when it comes to what is and is not tax deductible.
In some states, however, that just happens by default. For example, in Colorado, the state income tax form is based upon the taxable income that you calculate for your federal income taxes. In other words, if you deducted it on your U.S. income taxes, it is already deducted when you start doing your state income taxes. That isn’t how every state works, however.
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When it comes to Health Savings Accounts, however, most states play ball.
Most states do not tax contributions or earnings on Health Savings Account funds, just like the Feds. There are also nine states without any income taxes at all, so obviously they do not tax that contributions either.
However, there is always an exception. Three states tax contributions to HSAs in one way or another: California, Alabama and New Jersey.
There are two states that do not tax the contributions, but do tax earnings. That is New Hampshire, and Tennessee.
If you live in any of these five states, you’ll need to do some research to find out exactly what and how your HSA dollars might be taxes. Everywhere else though, your contributions save you even more money by also being deductible on your state income taxes.