California and New Jersey Tax the $4,400 a $65,000 Filer Puts in an HSA for 2026

A $65,000 single filer who puts the 2026 maximum of $4,400 into a self-only health savings account pays $299 more California income tax, and $243 more New Jersey income tax, than either state would charge if it followed the federal exclusion. Both states tax the full $65,000 of wages for tax year 2026 (the return filed in 2027), and neither cares whether the contribution came out of a paycheck or was written as a check.

The federal limit is set by Rev. Proc. 2025-19: for calendar year 2026, the §223(b)(2) deduction limit is $4,400 for self-only coverage under a high-deductible health plan and $8,750 for family coverage. Everything below uses the self-only figure.

Two routes into the account, one federal answer

A health savings account can be funded two ways. Money taken out of salary through an employer's cafeteria plan is treated as an employer contribution, which Publication 969 excludes from income; it never reaches box 1 of the W-2. The employer reports it instead in box 12 with code W, which the 2026 W-2 instructions define as "any employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan)." Money you deposit yourself is deducted on the federal return instead, through April 15 of the following year.

For the $65,000 filer, either route lowers federal taxable income from $48,900 (after the $16,100 standard deduction) to $44,500. Both figures sit inside the 12% bracket that runs from $12,400 to $50,400 in Rev. Proc. 2025-32, so the contribution saves $4,400 × 12% = $528 of federal income tax. The payroll route also skips Social Security and Medicare tax, which is worked through in the year-end moves piece.

The states below take neither route.

California switches off two sections of the Internal Revenue Code

California law adopts most of the federal code by reference, so it has to name what it refuses. For health savings accounts it names two sections. R&TC §17131.4(a) says "Section 106(d) of the Internal Revenue Code, relating to contributions to health savings accounts, shall not apply," which removes the payroll exclusion. R&TC §17215.4, on the books since 2005, says the same of §223 itself, which removes the deduction and the account's tax-exempt status. SB 711 last amended §17131.4, effective October 1, 2025, and subdivision (a) still reads that way.

The Franchise Tax Board turns that into three lines on Schedule CA (540):

• Payroll contributions, line 1h, column C: "Enter the amount of any employer HSA contribution from federal Form W-2, Wage and Tax Statement, box 12, code W." The code W figure goes back into California wages.
• Direct contributions, line 13, column B: "Federal law allows a deduction for contributions to an HSA account. California law does not conform." The federal deduction comes back out.
• Earnings, line 2: "Interest or earnings in an HSA are taxable in the year earned." Gains on investments sold inside the account are adjusted on line 7, through California's own Schedule D.

The rule runs in the filer's favor on the way out. Because the money was taxed going in, line 8f says a distribution "not used for qualified medical expenses" and taxed federally "is not taxable for California purposes."

The latest attempt to change any of this was AB 781 of the 2025–2026 session, which would have amended both sections. It never got a committee hearing and died on January 31, 2026.

New Jersey never wrote the exclusion in

New Jersey's gross income tax does not start from federal adjusted gross income; its return starts from the state wages in box 16 of the W-2. So New Jersey has nothing to switch off, and a federal exclusion counts only where New Jersey has written one of its own. For Archer medical savings accounts, the older federal account, it did. For health savings accounts it has not, and the Division of Taxation's own lists show the gap:

• Payroll contributions: The NJ-WT withholding guide lists what employers leave out of New Jersey state wages. "Medical Savings Account (IRC Section 220, Archer MSA) contributions excludable for federal purposes" are on the list. HSA contributions are not, so a code W amount stays in box 16, the state-wages box that line 15 of the NJ-1040 tells you to copy. The same instructions exempt some cafeteria-plan benefits "but not salary reduction or premium conversion plans."
• Direct contributions: Worksheet F, the New Jersey medical-expense deduction, has a line for "qualified Archer MSA contributions" and none for an HSA.
• Earnings: No New Jersey provision excludes them, and the bill that would do so says so.

That bill is A2634, introduced January 13, 2026 and referred to the Assembly Commerce and Economic Development Committee, where it has had no further action. Its sponsors' statement describes current law plainly: "The tax advantages provided under federal law are not available under the current New Jersey gross income tax." The same bill was introduced in the 2024 session as A1311.

What the refusal costs the $65,000 filer

The cost is the state tax on $65,000 of wages minus the state tax on $60,600, the wages the federal return sees after a payroll contribution.

In California the filer subtracts the $5,706 standard deduction from each. The added $4,400 of taxable income falls on both sides of the bracket edge at $57,542, so part of it is taxed at the 6% rate and the rest at 8%, rates set by R&TC §17041. The total is $299.

New Jersey allows a $1,000 personal exemption and no standard deduction, so taxable income is $59,600 without the add-back and $64,000 with it. Both sit in the 5.525% band that runs from $40,000 to $75,000 on the Division's Table A: $4,400 × 5.525% = $243.

Wisconsin is in the table because it used to refuse too. Its Department of Revenue says that "effective for taxable years beginning in 2011 and thereafter, Wisconsin follows the provisions" of the 2003 law that created health savings accounts, and its Fact Sheet 1105 restates the 2026 limits of $4,400 and $8,750. Alabama has allowed a deduction for contributions "made on or after January 1, 2018" up to the federal limit, according to the Alabama Department of Revenue.

California's and New Jersey's 2026 entries in our tables are provisional: each carries its 2025 schedule forward until the state publishes a 2026 one. New Jersey's brackets are not indexed, so its figure will not move. California's brackets are re-indexed every year under §17041(h), so its figure can change when the Franchise Tax Board publishes the 2026 schedule.

The part the dollar figure leaves out

The $299 is a one-year cost on the contribution alone. In California, an account invested for retirement adds its interest, dividends and realized gains to the return every year the account holds them, which the federal return never does. A filer who carries a balance for decades pays that every year in California, and the cost grows with the balance rather than with the contribution. Run the $65,000 and $60,600 cases side by side in the calculator to see your own state's figure for the federal exclusion that California and New Jersey decline.