Part year resident Roth IRA conversion question?
Moved to MO in 7/10 from CA (long time CA resident). For 2010, part year Calif and part year MO resident. Converted $60K IRA with $36K basis to Roth IRA in 12/10, after move to Mo, with taxable amount to be taxed in 2011 and 2012. For State purposes, which state is entitled to the 2011 and 2012 tax amounts due, CA or MO?
Permalink Submitted by Peter Lingane on Wed, 2011-03-16 19:46
California does not tax retirement distributions received by a nonresident. See FTB Pub. 1005 which is available at http://www.ftb.ca.gov.
I don’t know the rules in Missouri. The Missouri basis in your IRA may differ from the California basis.
Permalink Submitted by Alan Spross on Wed, 2011-03-16 19:48
MO. CA cannot collect state taxes for periods of time after you left the state even if the conversion had been done while a CA Resident. The 2011 and 2012 conversion income reported on your federal return will also be taxable in MO, unless the state allows you to opt out of deferral even if you did not opt out of the federal deferral.
Permalink Submitted by Peter Lingane on Wed, 2011-03-16 20:25
Alan and I agree that California does not tax an IRA distribution received after leaving the state. I’m not sure that Alan is correct, however, to say that California is willing to forgo income deferred to 2011/12 for a Roth conversion that takes place while the taxpayer is a resident. The taxable income is realized while the taxpayer is a resident; the only thing that is deferred is the time when the income is reported.
Perhaps Alan can provide a citation. I not aware of FTB pronouncements one way or the other.
Permalink Submitted by Alan Spross on Wed, 2011-03-16 20:51
I agree that it does not seem logical that CA would forego the taxes if the conversion occurred while a resident.
My understanding is that elimination of the source tax in 1996 resulted in the following FTB ruling with respect to 1998 conversions:
http://www.ftb.ca.gov/law/rulings/active/lr98_3.shtml
Further, that there was an Oct, 2010 meeting of CA CPA in which it was stated that the treatment of 1998 Roth conversions would carry over to the deferral of 2010 Roth conversion income. I do not know if this is stated clearly in the 2010 CA FTB booklet, but if a specific change had been adopted it should have been published in that booklet or in another Notice.
There obviously are still issues. An example would be a conversion that took place while a CA resident in 2010 and taxpayer established domicile elsewhere on 7/1/2011. The question here is whether the 2011 share of the conversion is fully due to CA as incurred on 1/1/2011 OR is pro rated to 7/1/2011. I further suspect that there could be some messy credit for state taxes issues depending on the provisions of the incoming state of residence.
Best that posted converted after establishing MO residency.
Permalink Submitted by Peter Lingane on Wed, 2011-03-16 20:54
Alan is correct. The following appeared in the February 2011 FTB “TaxNews.”
If a taxpayer chooses to defer to 2011 and 2012 and the taxpayer leaves California in one of those years how is the conversion treated for California purposes? Similarly, how is the conversion treated if a nonresident moves into California?
In Legal Ruling 98-3, Taxation of IRA Distributions Rolled Over to a Roth IRA Followed by a Change of Residence Status, we provided guidance as to the tax treatment of California residents who converted a traditional IRA to Roth IRA in 1998 and then change residence during the ratable period between 1999 and 2001, as well as the tax treatment of non California residents who converted an IRA to Roth IRA in 1998 and then become California residents in the period between 1999 and 2001. The analysis in this ruling remains applicable to the new deferral rule allowing taxpayers to report the income from the conversion of a traditional IRA ratably over the two years following the conversion.
Outbound taxpayers must include in gross income only those portions of the taxable distribution reportable under the two year rule before they became nonresidents. Under R&TC section 17952.5 the gross income of a nonresident does not include qualified retirement income including income from an IRA, received on or after January 1, 1996. R&TC 17952.5 prevents the imposition of California tax on the portions of the IRA distribution recognized after an individual becomes a nonresident.
California will allow for the proration of the taxpayer’s income from the conversion based upon the number of days a taxpayer is within California during the two years of the proration. An individual who makes a rollover contribution from an IRA to a Roth IRA before January 1, 2011 and changes residency in 2011, must include in California adjusted gross income one half of the taxable portion of the distribution multiplied by a fraction, the denominator of which is the total number of days in the taxable year and the numerator of which is the number of days in the year in which the individual is a California resident.
If the taxpayer changes residency during the second year, the amount included in California adjusted gross income for the year of the change in residency is one half of the taxable distribution multiplied by a fraction, the denominator of which is the total number of days in the taxable year and the numerator of which is the number of days in the year in which the individual is a California resident.