Qualified 2020 Disaster Retirement Plan Distributions and Repayment under CA Law
Hello: We have a situation where a client was a CA Resident in 2020, They relocated to New Zealand in 2021. They took an early distribution from a retirement plan and deferred 2/3's of it until 2021 and 2022 respectively both under Federal Law and conforming CA Law, using the Corona Virus exclusion exception. The question is, do we file a CA 540 NR for 2021 and 2022 since the original source income was taxable to CA in 2020, and had this exclusion not existed, the distribution would have all been taxable to CA in 2020. We can not find any guidance in the CA R&T Code, in FTB guidance and this subject is beyond the pay grade of the personnel we spoke with at the CA Franchise Tax Board. Any recommendations?
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I'll take a stab at it (my practice is in California). I say no, because income from intangibles (such as interest, dividends, and retirement accounts) is sourced to where the taxpayer is resident when received. Even though the distribution was received all in one year, the taxable income is only recognized at 1/3rd each year, and that is what matters. Now if they were a part-year resident for 2021 (which seems highly likely, unless they moved on New Year's Day), then I would pro-rate the 2021 taxable amount by days as a CA resident over total days in the year.
This isn't the first time something like this has happened -- back when Roth IRAs were first introduced around the turn of the century, I recall there was an election to take a 4-year spread on conversion income from Traditional IRAs. I was not a tax pro at the time so have no reference materials, but maybe you can find something old and dusty on the internet. You could also try FTB Publication 1005 and FTB Publication 1100 but I don't think you'll find an answer plainly spelled out."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard -
Thanks for taking a stab at it Robert. Your answer is more thoughtful than the FTB. Cheers!Comment
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If CA is like SC, it will be expecting the 2021 and 2022 returns even if those are filed as nonresidents. Most states included these provisions when they conformed to the federal treatment.Comment
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Can you provide a link to the official tax document or better yet the law that SC has implemented? If someone has truly become a non-resident, I don't see how SC could enforce this, since there will be no property to lien and no compensation to levy.
Back to California, as I said it's pretty vague how this would apply. In fact, despite repeated attempts I have never found the actual law that conforms CA to this treatment of retirement plan distributions. Everyone just does some hand-waving and says CA conforms, the FTB is pretty vague but they do accept returns with Form 8515-E/F. California normally conforms to IRC as of a specific date, which as of now I believe is in 2015. The best I can tell, if CA conforms it is due to disaster area declarations, not the code around retirement plan distributions per se.
Again, I must point out this is not the first time this type of situation has arisen."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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