State Taxes on TIRA to Roth conversion in 2010
If one elects to report 50% of the amount converted as income for 2011 and 2012 for Federal Income Tax purposes does that also hold true for State Tax which might be due or would the income for State Taxation need to be reported in 2010?
Thank you.
Permalink Submitted by Alan Spross on Sat, 2009-10-17 01:52
Good question.
Most states have probably not even thought about this yet. The outcome will depend on whether they conform automatically with federal rules or must pass conforming legislation. But when the 2010 state forms are completed, this subject will need to be addressed by each state, at least the ones that do not automatically conform to federal rules.
Permalink Submitted by mk foss on Sun, 2009-10-18 23:56
California does not automatically conform to all federal legislations – however they do automatically follow the sections relating to retirment plans. So California will tax Roth conversions in the same year as the IRS.
It’s still possible they could enact an exception but the few tax bills that have been passed in the last session have been vetoed for the most part.
Permalink Submitted by Anonymous (not verified) on Mon, 2009-11-23 23:03
Here’s a cool question. I convert to Roth in 2010 when I live in a state with an income tax that conforms to federal rules and don’t elect out of the 2 year income spread. I move to FL or Texas or Nevada or one of those cool states that have no income tax on 1/1/2011. Will I be able to avoid state income tax on my 2010 conversion?
Permalink Submitted by Alan Spross on Tue, 2009-11-24 00:04
Yes, unless CA adopts some special provision to recapture the tax. However, the source tax was ruled unconstitutional by Congress in 1996 which ended the ability of states to pursue tax collection from non residents who earned the taxable income while previously a resident of the prior state. CA would have to adopt some provision that was not considered a source tax to be able to attempt collection, probably an exception to the current rules of conforming to the feds on retirement plan issues.
The desperate need for state revenue is there, however their sights are set on larger revenue issues than this one. Moreover, their staffing of their tax agencies is being cut back in many of these states due to budget shortfalls.
Thus, like prior advice on Roth conversions, if you are moving to a no tax or low tax state, hold off on the conversion until you establish residency there. For 2010, you might be able to do that conversion will still in the prior state and escape taxes if you move out in time.