Are HSA Contributions Taxable in Wisconsin? How to Report Them
Understand how Wisconsin taxes HSA contributions, how to report them correctly, and key differences from federal tax rules to ensure compliance.
Health Savings Accounts (HSAs) offer tax advantages at the federal level, but Wisconsin does not fully conform to federal HSA tax treatment. This difference can create confusion when filing state returns.
Understanding Wisconsin’s approach to HSA contributions and distributions is essential for avoiding unexpected tax liabilities. Proper reporting ensures compliance and prevents penalties.
Differences Between Federal and Wisconsin HSA Rules
Federally, HSA contributions reduce taxable income, earnings grow tax-free, and qualified withdrawals are not taxed. Wisconsin, however, does not recognize HSAs as tax-advantaged accounts. Contributions deducted federally must be added back to Wisconsin taxable income, and HSA earnings—such as interest, dividends, and capital gains—are taxable at the state level.
For example, if a taxpayer contributes $3,000 to an HSA and deducts it on their federal return, they must add back that $3,000 when calculating Wisconsin taxable income. HSA earnings must also be reported as income on the state return, similar to any standard savings or investment account.
How to Report Contributions on State Returns
Wisconsin requires adjustments to reflect its nonconformity with federal HSA rules. The total contributed during the tax year appears on federal Form 8889, attached to Form 1040. Since these amounts are deducted federally, Wisconsin requires an addition to income to reverse this benefit.
On Wisconsin Form 1, this adjustment is reported in the “Additions” section. Specifically, the amount deducted federally must be included on Line 4 of Schedule SB. For those using Form 1NPR, the adjustment is made in the Wisconsin column of the income section.
HSA earnings must also be reported as taxable income. Interest and dividends go on Schedule B, while capital gains are reported on Schedule WD.
Handling Employer-Funded HSAs
Many Wisconsin employees receive employer HSA contributions. While these contributions are excluded from federal taxable income, Wisconsin considers them taxable wages.
Employers report HSA contributions on an employee’s W-2, in Box 12 with code W. Federally, this amount is not included in taxable wages, but Wisconsin requires it to be added back. Employees must include employer contributions when determining their state taxable income by reporting them on Schedule SB.
Because Wisconsin taxes employer HSA contributions, they are also subject to state withholding tax, Social Security, and Medicare taxes. Employees may notice a difference between their federal and state withholding amounts. To avoid underpayment, they can request additional state withholding or make estimated tax payments.
Post-Tax Contributions
Post-tax HSA contributions do not require an income adjustment on the state return since they have already been taxed. However, Wisconsin does not allow a deduction for these contributions, meaning there is no state tax benefit.
Taxpayers should track post-tax contributions separately to ensure accurate reporting of basis when withdrawing funds. This is especially important for non-medical withdrawals, as Wisconsin taxes HSA earnings and may impose additional penalties. Keeping clear records of taxed contributions helps prevent overpayment of state income tax when reporting distributions.
Adjusting for Nonqualified Distributions
Wisconsin taxes HSA distributions differently from federal law, particularly for non-medical expenses. The IRS imposes a 20% penalty on nonqualified withdrawals before age 65, but Wisconsin taxes these distributions as income and requires additional adjustments for previously untaxed earnings.
To properly report nonqualified distributions, taxpayers must include the full amount withdrawn on their Wisconsin return. Since HSA earnings are taxable at the state level, any portion of the withdrawal attributable to interest, dividends, or capital gains must be reported separately as investment income. Unlike federal rules, where only the non-medical portion is taxed and penalized, Wisconsin taxes the entire distribution.
Maintaining detailed records of HSA transactions helps ensure accurate reporting and prevents miscalculations.