CA pension, NM resident

[joanmcq]

Client withdrew all of her CA pension (state teacher's retirement) early, code 1.  The pension withheld CA tax.  I think, she will get it all back.  Plunk the figures in and she owes $35.  What?  It's the 2.5% CA tax on early distributions.

Does CA get to tax a CA pension early withdrawal for a non-resident?

[Catherine]

I thought most states had reciprocity on pensions, so the tp gets taxed in resident state only rather than issuing state. But I have no understanding of CA other than that "they're special" (or, think they are, and make pro's miserable because of it).

[BulldogTom]

This is wierd, but I think I know what is happening.  Since the CA 540NR has you recalculate your entire return as if you were a CA resident, calculates the tax, and then takes a percentage of the tax based on the percent of your income from the state, it kinda makes sense that IF the TP was a CA resident, they would have to pay CA the penalty so the NR is calculating it.   

Since the Income is not CA sourced on the NR, the penalty should not be included.   I am not in front of my software right now, so I can't tell you how to over ride the penalty calculation.   I would definitely not include the penalty in the CA NR return.

Tom
Longview, TX

 

[joanmcq]

Yes, the CA tax rate, line 36 of the NR, shows as .0208.  I wasn't sure whether to just delete the 3805P or file for a credit to NM for taxes paid to another state. Ended up deleting the 3508P

[BulldogTom]

6 hours ago, joanmcq said:

Yes, the CA tax rate, line 36 of the NR, shows as .0208.  I wasn't sure whether to just delete the 3805P or file for a credit to NM for taxes paid to another state. Ended up deleting the 3508P

I think I would include the 3508P but find one of the exceptions to plug in to eliminate the penalty.  I think I would try to find any exception that is close to the situation to make the penalty go away while still including the form in the return.    

My guess, and it is only a guess, it the state will see the penalty on the fed return and generate a letter for the CA penalty.  It is easier to respond to a letter with a copy of the filed form and explaining the exception to the penalty than to explain why you did not include a form that explains the tax position taken.

You do what you think is best - I have never run into this situation before.

Tom
Longview, TX

[joanmcq]

I looked for any kind of exemption, but couldn't find anything close.  I was looking.  I just deleted the 3508P and warned the client.

[Slippery Pencil]

On 3/25/2024 at 4:12 PM, Catherine said:

I thought most states had reciprocity on pensions, so the tp gets taxed in resident state only rather than issuing state.

That's federal law https://www.congress.gov/bill/104th-congress/house-bill/394/text