California’s SB 230 gives you a state income tax deduction for Health Savings Account contributions, but only if your adjusted gross income is under $42,000 as a single filer or under $87,000 if you file jointly, as head of household, or as a surviving spouse. The deduction is available for tax years beginning on or after January 1, 2025, and the law sunsets before January 1, 2030.1California Legislative Information. California SB 230 – Income Tax: Health Savings Accounts
Before this law, California taxed every dollar you put into an HSA as ordinary income on your state return, even though the IRS let you deduct it. SB 230 changes that for qualifying taxpayers by applying Section 223 of the Internal Revenue Code to California’s personal income tax, with a few important modifications.2Franchise Tax Board. Franchise Tax Board Bill Analysis – SB 230
The Income Caps Decide Everything
This is where most people find out whether they qualify. SB 230 limits the California HSA deduction to taxpayers whose AGI falls below:1California Legislative Information. California SB 230 – Income Tax: Health Savings Accounts
- $42,000 for single filers
- $87,000 for joint filers, heads of household, and surviving spouses
These figures are adjusted annually using California’s tax bracket indexing, so they may rise slightly each year with inflation.2Franchise Tax Board. Franchise Tax Board Bill Analysis – SB 230 There is no equivalent income cap at the federal level. If your AGI is over the California threshold, your federal HSA deduction is unaffected, but California will keep taxing your contributions as ordinary income, exactly as it did before SB 230.
You Still Have to Be HSA-Eligible Under Federal Rules
Meeting the income cap is only half of it. You also need to satisfy the federal HSA eligibility rules. The main requirement is enrollment in a High-Deductible Health Plan. For 2026, the IRS defines an HDHP as a plan with a minimum deductible of $1,700 (self-only) or $3,400 (family), and maximum out-of-pocket expenses no higher than $8,500 (self-only) or $17,000 (family).3Internal Revenue Service. Revenue Procedure 2025-19
You cannot be covered under a second health plan that isn’t an HDHP, though standalone dental and vision coverage are fine. You also cannot be enrolled in Medicare or be claimed as a dependent on someone else’s return.4Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
How Much You Can Contribute and Deduct
For 2026, the IRS caps annual HSA contributions at $4,400 for self-only coverage and $8,750 for family coverage. If you’re 55 or older, you can add another $1,000 as a catch-up contribution.3Internal Revenue Service. Revenue Procedure 2025-194Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
The California deduction tracks the same contribution limits. Contribute $4,400 with self-only HDHP coverage and an AGI under the cap, and you can deduct the full $4,400 on both your federal and California returns. The state deduction is above the line, so you don’t have to itemize to claim it. Someone in California’s 9.3% bracket contributing the full self-only amount saves roughly $409 in state tax, on top of federal savings.1California Legislative Information. California SB 230 – Income Tax: Health Savings Accounts
Conformity to Section 223 also means investment growth inside the HSA and withdrawals for qualified medical expenses receive the same favorable state treatment they get federally, for the duration of the law.1California Legislative Information. California SB 230 – Income Tax: Health Savings Accounts
Penalties for Non-Qualified Withdrawals
Withdrawals for qualified medical expenses come out tax-free at both levels. If you pull HSA money for something other than qualified medical expenses before age 65, the withdrawal is treated as ordinary income and hit with an additional tax. Federally, that additional tax is 20%.4Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts California’s penalty under SB 230 is only 2.5%.1California Legislative Information. California SB 230 – Income Tax: Health Savings Accounts
Once you turn 65, the federal additional tax disappears; you owe only regular income tax on non-medical withdrawals. The same exception applies if you become disabled.4Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
Reporting on Your California Return
The Franchise Tax Board handles the HSA deduction through Schedule CA (540), the form that reconciles differences between your federal and California adjusted gross income. Because California now conforms to federal HSA rules for qualifying taxpayers, the adjustments on Schedule CA look different than in prior years, when HSA amounts had to be added back to state income.
Plan for the 2029 Sunset
SB 230 is temporary. It applies only to tax years beginning on or after January 1, 2025, and before January 1, 2030, and the enabling section of the Revenue and Taxation Code repeals itself on December 1, 2029.1California Legislative Information. California SB 230 – Income Tax: Health Savings Accounts Unless the legislature extends the law, California reverts to its earlier position after that: HSA contributions fully taxable at the state level, investment growth taxable, and no state deduction. The federal tax treatment is written into the Internal Revenue Code with no expiration, so it stays in place regardless of what California does.