23 June 2022 17:20

Is there any state tax (California) advantage to putting money into a limited purpose FSA versus putting it all into an HSA?

Should I contribute to Limited Purpose FSA?

When you are covered by a High-Deductible Health Plan (HDHP) and you know you may be required to pay higher amounts for the medical expenses you incur it especially makes sense to contribute towards your Limited FSA for dental and vision expenses that you plan on incurring.

Is FSA exempt from California state tax?

With an FSA, your out-of-pocket health, dental or vision expenses and/or dependent care expenses are paid with tax-free dollars. FSAs are exempt from federal taxes, Social Security (FICA) taxes and, in most cases, state income taxes. You can typically save an average of 30 percent on all of your eligible expenses!

Does contributing to FSA reduce taxable income?

Key Takeaways. An FSA helps employees cover health-related costs not included in their insurance plans. Contributing to an FSA reduces taxable wages since the account is funded with pretax dollars. Since your $2,000 FSA contribution is paid in pretax dollars, it cannot be taken as a tax deduction.

Are FSA contributions pre-tax in California?

Healthcare Flexible Spending Account (FSA)



Account Overview: You can set aside money from your pay, pre-tax, and use it for medical, dental, and vision expenses any time during the plan year.

Is HSA taxable in California?

Yes, unfortunately, California taxes HSA contributions and the Long Term Capital Gain is considered a contribution so you would have to include the entire $2000.

Are FSAs worth it?

A health care FSA is also “worth it” to account holders because it gives them access to the entire annual amount elected beginning on the very first day of the plan year for medical, dental, & vision costs. (Please note: The IRS excludes this feature for dependent care.)

Does HSA reduce state tax?

State income taxes are also waived on HSA contributions in almost all states, with the exception of California, New Jersey, and Alabama.

Does California allow a deduction for HSA contributions?

Although California has not conformed to HSAs, California law does conform to the federal rules for Medical Savings Accounts (MSAs), and allows a deduction equal to the amount deducted on the federal return for the same taxable year. California imposes a 12.5 percent additional tax rather than the 20 percent additional

Why am I getting taxed on my HSA?

If an HSA is funded by contributions from both the employer and the employee, it will be important to ensure that the total contributions remain within the annual IRS limits. Contributions made in excess of these annual limits may become taxable income to the employee.

How can I avoid paying taxes on my HSA?

Contributions made to your HSA by your employer may be excluded from your gross income. The contributions remain in your account until you use them. The earnings in the account aren’t taxed. Distributions used to pay for qualified medical expenses are tax-free.

Do I have to report my HSA on my tax return?

Tax reporting is required if you have a Health Savings Account (HSA). You may be required to complete IRS Form 8889. HSA Bank provides you with the information and resources to assist you in completing IRS Form 8889 regarding your HSA.