What happens if I defer taxes and change states?
Presently in CA (high taxes) but could be moving to TX in 2011 or 2012 (no state income tax). Can I convert today, defer the taxes and then benefit from paying the rate in whatever state i move to?
Presently in CA (high taxes) but could be moving to TX in 2011 or 2012 (no state income tax). Can I convert today, defer the taxes and then benefit from paying the rate in whatever state i move to?
Permalink Submitted by Alan Spross on Fri, 2010-12-31 18:25
Surprisingly, the answer appears to be “Yes”.
Attached is copied from a response by Mary Kay Foss who practices in CA:
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I missed the annual CalCPA meeting with FTB in October but I was surprised to hear that CA will not chase taxpayers who convert in 2010 and then move out of the state. CA automatically conforms to all federal tax rules in the retirement plan area. Since IRS allows an election to report all in 2010, CA also allows an election but the CA election need not be the same as the federal election.
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So apparently, you could actually opt to report your conversion in 2010 for federal tax purposes, make an election to defer for CA FTB, move to a no income tax state like TX in 2011, and avoid CA tax liability for periods of time after establishing residence elsewhere. Now if you moved 6 months into 2011, there may be a question whether CA will require half of your 2011 deferred conversion income reported on a part year return or take the position that the 2011 share was incurred in January and go after all of it.
The source tax issue which was resolved in 1996 says that a state cannot go after taxes on pension income earned while a resident of that state if they are paid after leaving that state. This apparently also applies to conversions done in states like CA and the year you report the income is tantamount to receiving the benefit.
Something tells me that we have not heard the end of this, but states have been very slow to address this issue given their desperation for tax revenue and 2010 being a massive conversion year with the vast majority of that conversion income deferred to 2011 and 2012.
Permalink Submitted by Mike Hunt on Fri, 2010-12-31 19:41
but in the end, I could convert 100% today, then use Jan. to get more details and confirmation of what will apply for CA. Should it not work out to my benefit (or for any other reason for that matter) I can recharacterize well before april 15, correct?
Permalink Submitted by Alan Spross on Fri, 2010-12-31 20:21
Right, you can recharacterize up to 10/17/2011, but you may have run out of time to get a conversion done this year.
Permalink Submitted by Mike Hunt on Mon, 2011-01-03 17:57
Got our conversion in just under the wire for 2010.
And on another note Alan, I’d just like to personally thank you for all of your valuable and insightful responses that truly helped guide me since I began posting questions on this site. I’m not sure if anybody takes the time to say so, but I wanted to express my gratitude for being able to tap into your considerable knowledge about IRA’s that allowed me to proceed in the process with as much confidence as possible.
Will
Permalink Submitted by Alan Spross on Mon, 2011-01-03 23:54
Appreciate that, and good luck to you in 2011.
alan