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How to report HSA MMF dividends for California state income

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February 27, 2025
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Hi, I are working on my 2024 tax return (both federal and California) using TurboTax Premier 2024 desktop version. I had received some dividends from money market funds in my HSA account for the year of 2024. Per my understanding, there is no need to report such dividends for federal tax return as HSA contribution and gains are tax free; however, I need to report that for California state tax return. My questions:

1. Where do I report received dividends for a HSA account in TurboTax?

2. I hold MMF which invested in U.S. government securities, and Fidelity (my broker for the HSA account) said part of the dividends are tax-exempt for California. For example, if a MMF had 97% income from U.S. government security, then 97% would be CA tax-exempt. That means, only 3% of the dividends need to be considered for California tax. How do I report/adjust that?

Best answer by henrysf

Thanks @BillM223.

I just looked up "2024 FTB Publication 1001 Supplemental Guidelines to California Adjustments", and I found the following. It seems that only the dividends from U.S. obligations can be exempt from California tax.

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California does not tax dividends paid by a fund attributable to interest received from U.S. obligations or California state or municipal obligations if at least 50% of the fund’s assets would be exempt from California tax when held by an individual.

If the value of U.S. and California state or municipal obligations is at least 50% of the fund’s total assets, enter the amount of exempt interest dividends that are attributed to U.S. obligations included in federal income on Schedule CA (540), Part I or Schedule CA (540NR), Part II, Section A, line 2, column B.

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BillM223

In the California interview, there is a screen that is specifically for income and capital gains from your HSA account, which, in CA, is considered to be just an ordinary investment account.

As for your MMF, California has a rule that if more than 50% of the fund is in tax-exempt obligations, then it is treated as 100% tax-exempt. So, in the case you specify, don't report any of the dividends for the HSA.

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henrysfAuthorAnswer

Thanks @BillM223.

I just looked up "2024 FTB Publication 1001 Supplemental Guidelines to California Adjustments", and I found the following. It seems that only the dividends from U.S. obligations can be exempt from California tax.

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California does not tax dividends paid by a fund attributable to interest received from U.S. obligations or California state or municipal obligations if at least 50% of the fund’s assets would be exempt from California tax when held by an individual.

If the value of U.S. and California state or municipal obligations is at least 50% of the fund’s total assets, enter the amount of exempt interest dividends that are attributed to U.S. obligations included in federal income on Schedule CA (540), Part I or Schedule CA (540NR), Part II, Section A, line 2, column B.

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