Only two states tax Health Savings Account contributions and the investment earnings inside the account: California and New Jersey. Every other state with an income tax conforms to the federal treatment, letting you deduct contributions and shelter growth. Nine states have no income tax at all, so the question doesn’t arise. New Hampshire, which used to tax HSA interest and dividends, repealed that tax effective January 1, 2025.
New Jersey Taxes Both Contributions and Earnings
New Jersey’s gross income tax code doesn’t recognize Health Savings Accounts. The state has provisions for Archer Medical Savings Accounts, but those don’t extend to HSAs. Every dollar you contribute stays fully taxable at New Jersey rates, and interest, dividends, and capital gains earned inside the account are taxable each year as well. At the top marginal rate of 10.75%, that erodes a meaningful share of what the federal deduction gives back.
Legislators have introduced conformity bills. One acknowledged directly that “the tax advantages provided under federal law are not currently available under the New Jersey gross income tax.”1New Jersey Legislature. S1415 – Health Savings Account Conformity None have been enacted as of 2026. If you contribute to an HSA in New Jersey, you get the federal deduction and owe state tax on both the contribution and the account’s internal growth.
California Decouples From the Federal Rules
California’s Revenue and Taxation Code Section 17131.4 decouples the state from the federal HSA provisions. The federal exclusion for employer HSA contributions does not apply, individual contributions receive no state deduction, and interest, dividends, and capital gains inside the account are reportable on your state return.2California Legislative Information. SB-230 Income Tax: Health Savings Accounts
Conformity has been on the table repeatedly. SB 230 proposed a temporary conformity window, and AB 781 proposed conformity for tax years 2026 through 2030. Neither has become law, and any conformity that does pass will likely arrive with modifications rather than a straight adoption of federal rules. Check the Franchise Tax Board’s current-year guidance before you file.
Because you pay California tax on contributions as you make them, those dollars form a state cost basis in the account. Track it separately. When you withdraw that basis later, even for non-medical reasons, California won’t tax it again. Skip the tracking and you’ll pay state tax twice on money the state never sheltered.
Watch Your W-2 in California and New Jersey
If your employer contributes to your HSA, your W-2 will show different wages in different boxes. Box 1 (federal wages) excludes the employer contribution. Box 16 (state wages) includes it. The gap is correct, not a reporting error.
Tax software sometimes carries the federal wage figure into the state calculation, which understates what you owe. If you prepare your own return in either state, confirm that your state taxable income picks up employer HSA contributions and adds back any pretax payroll contributions you made yourself. States catch the mismatch through information matching, and the correction arrives with interest.
New Hampshire No Longer Taxes HSA Earnings
New Hampshire has no general income tax on wages but formerly taxed interest and dividend income, which reached HSA investment earnings. That tax has been repealed for taxable periods beginning after December 31, 2024.3NH Department of Revenue Administration. Interest and Dividends Tax The rate stepped down from 5% to 4% to 3% before hitting zero.4New Hampshire General Court. New Hampshire Revised Statutes Section 77-1 – Rate For the 2026 tax year, New Hampshire residents owe no state tax on HSA earnings.
The Nine States With No Income Tax
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming impose no individual income tax. If you live in one of them, no state-level HSA question arises and the federal tax treatment operates in full.
Non-Qualified Withdrawals in California and New Jersey
Federally, taking money out of an HSA for something other than a qualified medical expense adds a 20% penalty on top of ordinary income tax on the withdrawal.5Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans The penalty ends at age 65, at disability, or at death, though the income tax still applies.
The state math looks different in California and New Jersey because neither state gave you a break on contributions. Withdrawing your state basis creates no new state tax; only the investment-earnings portion of a non-qualified withdrawal adds to state taxable income. California has considered a modified 2.5% penalty during proposed conformity windows, compared to the federal 20%.6Franchise Tax Board. Bill Analysis, SB 230 – Health Savings Account Deduction Conformity
After age 65, the federal penalty disappears and non-medical HSA withdrawals are taxed as ordinary income. In conforming states, the account then behaves much like a traditional retirement account. In California and New Jersey, the after-65 outcome depends on whether either state has adopted conformity by the time you get there.