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| People acquire group term life insurance because this type of insurance is less expensive than individual insurance coverage. There are benefits for tax purposes in acquiring this type of insurance. You can exclude the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by your employer. If the amount goes over the $50,000, the amount in excess must be included in income and according to the Internal Revenue Service Premium Table. The amounts in excess are also subject to social security and Medicare taxes. If the employer pays any cost of the life insurance, or the employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee, a taxable fringe benefit arises once coverage exceeds $50,000. This is called the straddle rule. |
| California taxes the cost of group term life insurance for retirees funded by the transfer of excess pension assets. Enter the amount of the cost excluded for federal purposes on Schedule CA of Form 540 or Form 540NR, line 16, column C. |
| Health Savings Account (HSA) – Contributions |
| If you are a qualifying individual, you can benefit from tax-exempt benefits of a Health Savings Account (HSA). This is a tax exempt trust or custodial account you can set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. A trustee can be a bank, an insurance company, or anyone else who is approved by the Internal Revenue Service. You can establish an HSA through a trustee that is different from your health plan provider. Most employers already have the trustee information available in their area. Contributions made to your HSA account remain in your account until you use them. |
| You can claim a tax deduction for contributions you or anyone other than your employer makes to your HSA account. You don’t have to itemize your deductions in order to claim a deduction for your contributions to an HSA. If your employer makes the contributions, you may exclude it from gross income. Not for California though. You cannot exclude the contributions from W-2 wages which were made by your employer. California simply does not conform to this. Enter the amount of California nonconformity on Schedule CA of Form 540 or Form 540NR, line 7, column C. Also enter the amount from Schedule CA of Form 540 or Form 540NR, column A, line 25, in column B, line 25. |
| Health Savings Account (HSA) – Distributions |
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Another benefit of an HSA is that interest or other earnings from the HSA assets in the account is that they are tax free. If you leave your job, you can take the HSA with you to your other job or even if you leave the work force. Your distributions could be tax free if you pay for qualified medical expenses. Therefore, any distributions not used for qualified medical expenses are includable in federal gross income. Consequently, the amount that is taxable by federal tax law is not taxable for California. Enter an adjustment to reflect this on Schedule CA, line 21f, column A, in line 21f, column B to exclude the amount from the taxable federal amount. |
| Health Savings Account (HSA) – Interest or Dividend Income |
| Interest or dividend income on the assets of the HSA accounts are tax free. However, California wants you to pay tax on the interest from HSAs. These interest amounts and taxable dividends earned on any HSAs are taxable for California in the year earned. Due to this treatment of interest or dividends earned and the fact that they are not taxable to California but are taxable to federal, California has a basis in the HSA account. You will need to make the adjustment on the flow thorough amounts from federal to California by entering the amounts of interest earned on Schedule CA, line 8, column C. Any taxable dividends earned for the current year need to be entered on Schedule CA, line 9, column C. |
| Copyright © 2014 [Hera's Income Tax School]. All Annual Federal Tax Refresher Course rights reserved. |
| Revised: 07/09/15 |
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