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    Planning for a CO move

    A client is considering a move from NC to CO in the spring of 2024. I have done some preliminary looking around the CO tax rules, as well as downloaded the 2022 CO tax software.

    Can a CO tax pro clarify (simple answers only) the following:

    1 -- There appears to be no reduction of taxable Form 1099-R amounts for retirement pension income / 401k distributions. I did see some exclusion for a "Denver" (?) retirement plan. Client receives retirement income from State of NC and a related 401k plan.
    2 - Based on the above, it would appear the only CO reductions from federal income will be the taxable portion of Soc Sec benefits and US govt interest reported on Sch B. (Schedule A will likely not apply.)
    3 - NC allows a state tax credit for taxes paid to other states. Included in those calculations are "foreign" income / taxes, not unlike simplified Form 1116 calculations. It appears that CO only allows the credit for "states" with no inclusion of non-US taxes, such as on Canadian stocks. (Client has fairly substantial dividends from several Canadian corporations, with taxes at the customary 15% rate.)

    NC has a weird animal known as the Bailey / Emory retirement exclusion for certain NC residents. Taking that away, and shrinking the "foreign state" tax credit, very rough calculations show the CO tax liability to be >2x what the NC tax liability is. OUCH!

    Any answers / insight that can be offered here will be greatly appreciated. It may turn out the client just decides to remain in NC. . .

    Thanks!

    FE

    #2
    "Can a CO tax pro clarify (simple answers only)"

    Not a CO tax pro, but I've checked TheTaxBook all states documents, which are very handy.

    "There appears to be no reduction of taxable Form 1099-R amounts for retirement pension income / 401k distributions"

    I don't see where NC excludes any retirement income either, except for that Bailey settlement thing you mention (and something called "Uniformed Services retirement benefits.​"). Are you trying to say that your client currently enjoys this specialized NC tax exclusion (only applies to a small class of taxpayers) which of course would not be offered by any other state?

    "Included in those calculations are "foreign" income / taxes,"

    I don't have a full survey of the various states, but again I suspect this is a very unique thing to NC. It's hard to see the justification, since the taxpayer already gets a federal tax credit for double-taxed foreign income, so why would a state duplicate that same credit? The taxpayer is getting a double credit for a single foreign tax paid.

    "It may turn out the client just decides to remain in NC."

    Ah, another case of the tax tail wagging the dog. If the primary factor in deciding whether to move is state income taxes (but not the other taxes or Cost Of Living factors), then surely your client will find paradise on Earth someplace like Texas, or Florida, or even North Dakota (after all, he's already used to having a sibling state starting with "South").
    Last edited by Rapid Robert; 08-19-2023, 12:48 PM.
    "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

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      #3
      Originally posted by Rapid Robert View Post
      "Can a CO tax pro clarify (simple answers only)"

      Not a CO tax pro, but I've checked TheTaxBook all states documents, which are very handy.

      "There appears to be no reduction of taxable Form 1099-R amounts for retirement pension income / 401k distributions"

      I don't see where NC excludes any retirement income either, except for that Bailey settlement thing you mention (and something called "Uniformed Services retirement benefits.​"). Are you trying to say that your client currently enjoys this specialized NC tax exclusion (only applies to a small class of taxpayers) which of course would not be offered by any other state?

      "Included in those calculations are "foreign" income / taxes,"

      I don't have a full survey of the various states, but again I suspect this is a very unique thing to NC. It's hard to see the justification, since the taxpayer already gets a federal tax credit for double-taxed foreign income, so why would a state duplicate that same credit? The taxpayer is getting a double credit for a single foreign tax paid.

      "It may turn out the client just decides to remain in NC."

      Ah, another case of the tax tail wagging the dog. If the primary factor in deciding whether to move is state income taxes (but not the other taxes or Cost Of Living factors), then surely your client will find paradise on Earth someplace like Texas, or Florida, or even North Dakota (after all, he's already used to having a sibling state starting with "South").
      The client currently receives ~$55k from State of NC retirement and ~$80k from NC origin 401k plan (RMD). The IRS taxes $135k of this income. NCDOR, due to the Bailey / Emory ruling / qualification, does not tax 1? of this income. (Apparently CO will also tax the full $135k.)

      The NC Form D-400TC is titled "Credit for income tax paid to another state or country" at the top of Part 1. The tax software has a pull-down menu for each state and also includes "foreign" as a choice. The tax credit is calculated by taking the non-NC income and dividing it by the total NC income. The allowable tax credit is the smaller of what taxes were actually paid to the other entity versus how much NC tax was calculated on that specific amount of income. The client being discussed receives an NC tax credit >$900. I routinely do the same calculations for other clients. The most common example is ownership of Canadian stocks, which automatically withhold a 15% amount when the dividends are paid.

      I am not in the business of pursuing "justifications" for any tax rules. If I were, my first target would be how many times you have to pay for Medicare. Let's see: 1) via employer or Schedule SE and 2) via Net Investment Income Tax followed by 3) IRMAA surcharges to include same for a spouse.

      As for the "paradise on Earth" reference -- Any reasonable person would consider "costs" (to include tax costs) related to a potential relocation. That's just good common sense. It's no different from many people who would never consider moving to CA or NYC specifically because of their confiscatory tax rates (and a few other things. . .).

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