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Tax Topic CA 5 - California Retirement Income

When filing a tax return you usually claim credits to help to help with your particular financial situation. It could be that your income is below a certain limit. It could also be that you are being double taxed because you also paid tax in another state for the same item. There are various reasons for a credit. Whatever the credit may be, you want to make sure you know that it exists so you will not missed claiming it on your income tax return.

 

You are not in a registered domestic partnership if you have never entered into a registered domestic partnership, you filed a Notice of Termination of Domestic Partnership with the Secretary of State and the six-month waiting period for the notice to become final has passed or your registered domestic partnership was annulled and you did not enter into another registered domestic partnership after the annulment.
 
Effective for taxable years beginning on or after January 1, 2007, RDPs under California law must file their California income tax returns using either the married/RDP filing jointly or married/RDP filing separately filing status. If you are an RDP, you may qualify to use the head of household filing status if you are in the process of ending your relationship and you meet the requirements to be considered not in a registered domestic partnership.
 
You were not in a registered domestic partnership if your registered domestic partnership was legally terminated under a final decree of dissolution. Neither a petition for termination nor an interlocutory decree of termination is the same as a final decree. Until the final decree is issued, an RDP remains in a registered domestic partnership.
 
You must be entitled to claim a dependent exemption credit for your parent to be head of household. That is, your parent must meet the requirements of a qualifying relative, you must have paid more than half the cost of keeping up a home that was your parent's main home for the entire year and also your parent's main home could have been his or her own home or any other living accommodation.
 
In meeting the residency test, a temporary absence may be due to illness, for education, business, vacation or military service or for incarceration.
 
To qualify for head of household filing status, your qualifying relative's gross income must be less than the federal exemption amount for the year in question.
 
If two or more taxpayers including a parent claim the same child as a qualifying child for a particular tax year, the person shall be treated as the qualifying child of the taxpayer who is a parent of the person or (if none of the taxpayers is a parent) the taxpayer with the highest adjusted gross income for the taxable year.
 
For 2011, you may file married/RDP filing jointly if you were never married and never entered into a registered domestic partnership, your spouse/RDP died in 2011 and you did not remarry or your spouse?RDP died in 2012 before you filed a 2011 tax return.
 
A registered domestic partner is a person who has filed a Declaration of Domestic Partnership with the California Secretary of State.
 
To be head of household, you must provide more than half of a person's total support during the calendar year to meet the support test. To determine whether you have provided more than half the support, compare the amount you contributed for the person's support to the entire amount of support the person received from all sources.
 
You are considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you and your nonresident alien spouse/RDP filed a joint return in a previous year, you chose to treat your nonresident alien spouse/RDP as a resident so you could file the joint return and you have not revoked that choice by the extended due date for filing the return at issue.
 
I was married at the end of the year. Can someone other than my child qualify me for the Head of Household filing status? No, because I was married.
 
Can I qualify for the Head of Household filing status if the person that qualifies me did not live with me during the year? Yes, if the person is my parent, he or she does not have to live with me to qualify me.
 
I was married at the end of the year. Can I qualify for the Head of Household filing status if I lived with my wife during part of the last six months of the year? No. Because I was married and therefore I do not meet certain requirements to be considered unmarried.
 
Can I qualify for the Head of Household filing status even though the qualifying person is not my relative? No. Only certain relatives can qualify you for the Head of Household filing status.
 
The Head of Household (HOH) filing status gives you the benefit of a lower tax and a higher standard deduction that the that of Single or Married Filing Separately filing status.
 
You paid $5,100 in child care, you are single and earned $28,000 for the entire year, and you have one qualifying child. Your child and dependent care expenses credit for tax year 2011 is $420.
 
I want to file my return and have no tax liability. If I claim the child and dependent care expenses credit, would I still get a refund for California based on my Child and dependent Care expenses credit? No, the amount of credit is limited to the amount of tax liability and is non-refundable.
 
Juan and Maria Escobedo are married and keep up a home for their two pre-school children. In tax year 2011, they claimed their children as dependents. Juan earned $25,200 and Maria earned $8,200. They paid $5,900 in work related child care expenses. Their credit is $738.
 
To claim the Child and Dependent Care Expenses Credit for California, you must complete and attach to your California tax return FTB Form 3506.
 
In tax year 2011, if your gross income is $45,000 and your federal child and dependent care expenses credit amount was $480, then your California Credit is $206.
 
For Federal the child and dependent care expenses credit is a non-refundable credit and for California the credit is also non-refundable.
 
The percentage of the federal Child and Dependent Expenses Care credit that is allowed for California for taxpayers who earned more than $100,000 in 2011 is 0%.
 
In tax year 2011, to qualify for the California child and dependent care expenses credit, your federal adjusted gross income must be less than $100,000.
 
In tax year 2011, if you are head of household and you would like to qualify for renter's credit, you would not qualify if your income is over $71,318.
 
If for more than half of the year, you lived in the home of a parent, foster parent, or legal guardian in 2011 who can claim you as a dependent, then you do not qualify for the renter's credit.
 
The non-refundable renter's credit qualification record must be kept with your records; therefore, you should not mail it.
 
To qualify for Renter's credit, you must have paid rent for at least 6 months of the tax year and your principal residence must have been in California.
 
If your filing status was married filing separate, you are still able to claim the California renter's credit.
 
If a single employer withheld California State Disability Insurance (SDI) from your wages at more than 1.2% of your gross wages, contact the employer for refund. You cannot claim the credit if you only have one employer.
 
You may be entitled to claim a credit for excess SDI on Form 540/540A if you had two or more employers during 2011, if you received more than $93,316 in wages, and if the amounts of SDI withheld appear on your forms W2.
 
If you discover that you made an error on your California income tax return after you filed it, use Form 540X to correct your return.
 
For purposes of claiming the California Child and Dependent Care Expenses Credit, if your child turns age 13 during the year the child is a qualifying person only for the part of the year he or she was 12 years old.
 
In tax year 2011, my wife did not work all year because she was not able to care for herself for the entire year. I worked and earned $21,050. We have one qualifying child for the Child and Dependent care credit. We paid $2,000 for child care. We can qualify for $310 of the credit.
 
If you are single and only paid rent for one month in 2011, you do not qualify to claim the renter's credit. You must have paid rent for at least 6 months in year 2011.
 
If you do not e-file your tax return, you may receive your refund just as fast, but most likely this is not so. Although there are less paper returns processed because almost everyone is e-filing, it is still much more faster to e-file your return and you will receive your refund faster too.
 
If there is no difference between your federal and California income or deductions, do not file a Schedule CA (540).
 
Individuals that would qualify you for the Child and Dependent Care Credit would be a dependent under 13 years of age, a dependent who is physically or mentally unable to care for him or herself or a spouse who is physically or mentally unable to care for him or herself.
 
One of the requirements to qualify to claim the Child and Dependent Care Credit for California is that you paid for care so you (and your spouse/RDP) could work or look for work.
 
Your must pay at 100% of the amount owed by April 17, 2012 to avoid interest and penalty charges.
 
You qualify for the Nonrefundable Renter's Credit if you rented a property for more than half the year that was not exempt from California property tax in 2011.
 
All domestic partners should either file jointly, separately or as head of household (if they qualify) under the new law.
 
You may not claim the Credit for Dependent Parent if you used the single, head of household, qualifying widow (er), or married/RDP filing jointly filing status. Claim this credit only if you were married/or an RDP at the end of 2010 and you used the married/RDP filing separately filing status, your spouse/RDP was not a member of your household during the last six months of the year and you furnished over one-half the household expenses for your dependent mother's or father's home, whether or not she or he lived in your home.
 
You may be entitled to claim a credit for excess SDI (or VPDI) only if more than 1.2% of your wages was over withheld from more than one employer. If more than this amount was withheld from only one employer then you should ask that employer for a refund. Thus, you cannot claim the credit if this is so.
 
The 2011 SDI (or VPDI) limit is $93,316.
 
If you and your spouse/RDP paid joint estimated taxes but are now filing separate income tax returns, either of you may claim the entire amount paid.
 
Attach a doctor's statement to the back of Form 540/540A indicating your or your spouse/RDP are visually impaired only the first time you file a tax return to claim the blind exemption credit.
 
What if I can't file by April 17, 2012, and think I owe tax? Then I would estimate the amount of tax owed by completing Form 3519.
 
If all your W-2 forms were not received by January 31, 2012, ask your employer (s) for a W-2. You must file your tax return and report all income received in the year, regardless if you received a W-2 or not.
 
You never received a Form W-2 and you asked your employer for one and employer refuses to issue a form, you should complete form FTB 3525 with your wage and withholding information.
 
If you didn't itemize deductions on your federal tax return it is possible to itemize deductions on your California tax return.
 
The Head of Household filing status is for taxpayers who are either unmarried and not an RDP or meet the requirements to be considered unmarried or considered not in a registered domestic partnership and maintain a home for a relative who lived in them for more than half the year.
 
An eligible foster child is a child for head of household purposes is a child placed with you by an authorized placement agency or by a judgment, decree, or other order of a court of competent jurisdiction.
 
Generally, if two or more people keep up the same home, only one of the people could pay more than half the costs and qualify for the head of household filing status. When two or more families occupy the same dwelling, each family may be treated as keeping up a separate home if each family maintains separate finances and neither family contributes to the support of the other family.
 
The taxpayer who provides more than half the cost of maintaining a separate home is treated as keeping up that separate home. To determine whether you paid more than half the cost of keeping up your home does not include costs of clothing and vacations, costs for education and transportation or costs for medical treatment and life insurance. This items would be considered for figuring the support of a dependent directly and not for the cost of maintaining a home.
 
If someone lived with you for six months this does not mean that the person lived with you more than half the year for head of household purposes.
 
If you have joint custody of your child, to qualify for head of household filing status, you must still meet all the requirements for the filing status, must have a child that must have lived with you for more than half the year and have paid more than half the cost of keeping up your home.
 
If you were married as of the last day of the year, and you did not live with your spouse at any time during the last six months of the year, to determine how many days your home was your qualifying person's main home, add together half the number of days that you, your spouse, and your qualifying person lived together in your home and add together all of the days that you and your qualifying person lived together in your home without your spouse.
 
If you were married as of the last day of the year and you lived with your spouse at any time during the last six month of the year, you cannot qualify for the head of household filing status.
 
You are considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you and your nonresident alien spouse/RDP filed as joint return in a previous year, you chose to treat your nonresident alien spouse/RDP as a resident so you could file the joint return and you have not revoked the choice to treat your nonresident alien spouse as a resident by the extended due date for filing the return at issue.
 
Residents of California are taxed on all income, including income from sources outside California.
 
For California, a resident is any individual who is in California for other than a temporary or transitory purpose and who is domiciled in California, but outside California for a temporary or transitory.
 
The underlying theory of residency is that you are a resident of the place you have the closest connections.
 
You and your spouse are California residents. You accept a contract to work in South America for 16 months. You lease an apartment near the job site. Your contract states that your employer will arrange your return to California when your contract expires. Your spouse and children will remain in California residing in the home you own. As a result, you are taxed on income from all sources, including income from South America.
 
You are a resident of California. You accept a 15-month assignment in Saudi Arabia. You put your personal belongings, including your automobile, in storage in California. You have a California driver's license and are registered to vote in California. You maintain bank accounts in California. In Saudi Arabia, you stay in a compound provided for you by your employer, and the only ties you establish there are connected to your employment. Upon completion of your assignment, you will return to California. As a California resident, your income from all sources is taxable by California, including the income that you earned for your assignment in Saudi Arabia.
 
A tax treaty between the U.S. Government and a foreign country may exempt some types of income from federal taxation. Generally, unless the treaty specifically excludes the income from taxation by California, the income is taxable to California.
 
The Franchise Tax Board does not issue tax clearance certificates for individuals as federal income tax clearance is issued.
 
California does not allow a foreign tax credit or a foreign earned income exclusion as federal does.
 
The wages of nonresident flight personnel (e.g. pilot, copilot, flight attendants) are taxable by California if more than 50% of the individual's schedule flight time is in California.
 
A merchant seaman who is in California only because this state is a port-of-call and who maintains no other contact or connections with this state, is not considered a resident.
 
There are many factors you can use to help you determine your residency status. For example, the location of your principal residence and location of your spouse and children is a factor to consider. The state in which you are registered to vote, where your license was issued and where your vehicles are registered and the location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member are very important factors.
 
Any individual who is a California resident for part of the year and a nonresident for part5 of the year is a part-year resident.

 

A safe harbor is available for certain individuals leaving California under employment-related contracts. The safe harbor provides that an individual domiciled in California who is outside California under an employment-related contract for at least 546 consecutive days will be considered a nonresident unless the individual has intangible income exceeding $200,000 in any taxable year during which the employment-related contract is in effect or the principal purpose of the absence from California is to avoid personal income tax.
 

Students who are residents of California leaving to attend an out-of-state school would not automatically become nonresidents and students who are nonresidents of California coming to this state to attend a California school would not automatically become residents.

 

You lived and worked in Kansas. You retired in Kansas and received your first pension check on January 1, 2011. You moved permanently to California on July 1, 2011. You pension income received beginning July 1, 2011 is taxable by California because California residents are taxed on all income, regardless of source.
 
It is important for California income tax purposes that you make an accurate determination of your residency status. Residency is primarily a question of fact to be determined by examining all the circumstances of your particular situation.

 

You are a resident of Nevada. You own residential rental property located in California. Your property has always shown a loss. You sold the property at a gain. Although you are a resident of Nevada, the gain on the sale is taxable in California because the property is located in California.

 

You can have only one domicile at a time. Once you acquire a domicile, you retain that domicile until you acquire another one. A change of domicile requires abandonment of your prior domicile, physically moving to and residing in the new locality and the intent to remain in the new locality permanently.

 

Maintain separate property separately. If the property or the income from the property is used for community purposes, or commingled, it could lose its separate property character, overriding any agreements. Separate property is property owned separately by the husband or wife before marriage or registering as a domestic partnership, property received separately as gifts or inheritances or property that is declared separate property in a valid agreement.
 

If you paid taxes to California and another state on the same income, you may qualify for a tax credit for taxes paid to another state.

_Federal law provisions prohibit states from taxing the retirement income of nonresidents.
 
For California, if you have an Individual Retirement Arrangement (IRA) basis and were a nonresident in prior years, you may need to restate your California IRA basis.
 
In 2011, the maximum contribution amount a California taxpayer can make to a Keogh Plan per year is $49,000.
 
A surviving spouse can rollover distributions from a deceased spouse's qualified retirement plan to a Section 457 plan in which the surviving spouse participates.
 
The California treatment of pensions, annuities, and IRAs is generally the same as the federal treatment of such income.
 
California does not impose tax on retirement income received by nonresidents after December 31, 1995.
 
The California treatment of pension and annuity income is generally the same as the federal treatment. California and federal law are the not the same regarding Social Security and railroad retirement benefits, Health Savings Accounts (HSAs) or all prior-year IRA deductions.
 
California and federal law are the same regarding the "General Rule", IRA rollovers and Coverdell Education Savings Accounts (ESAs).
 
If your pension plan invested in U.S. Government securities or in mutual funds that invested in U.S. Government securities, you may not reduce the taxable portion of your pension distribution by the amount of interest attributable to the U.S. Government securities.
 
California law differs from federal law in that California does not tax Social Security benefits, Tier 1 railroad retirement benefits or Tier 2 railroad retirement benefits reported on federal Form RRB 1099-R or sick pay benefits under the Railroad Unemployment Insurance Act.
 
Social Security and railroad retirement benefits are not taxable for California. However, Foreign Social Security benefits are taxable to California.
 
A tax treaty between the United States and another country which excludees the foreign social security benefits from federal income or which treats the foreign social security benefits as if it were United States social security does not apply for California purposes.
 
Railroad benefits paid by individual railroads are taxable by California.
 
Under the "Three-Year Rule", amounts you receive are not taxed until your contributions are recovered.
 
A pension attributable to services performed outside California but received after you became a California resident is taxable in its entirety by California.
 
You worked 10 years in Texas, moved to California and worked an additional 5 years for the same company. You retired in California and began receiving your pension which is attributable to your services performed in both California and Texas. You are a full-year resident of California and therefore are taxed on all you income, regardless of its source.
 
You worked in New York for 20 years. You retired and moved permanently to California on January 1. While living in California, you begin receiving your pension attributable to the services performed in New York. You do not make an adjustment on Schedule CA (Form 540) or Form 540A, to exclude any of the pension since you are a full-year resident of California and taxed on all income.
 
In December 2010, you retired and moved permanently to California. Prior to your move, you elected to receive your pension as a lump-sum distribution. Your pension is attributable solely to services you performed in Washington prior to your move. You received the lump-sum distribution in February 2011, after you became a California resident. You are a full-year California resident in 2011 and as a California resident, you are taxed on all income, regardless of its source.
 
You worked in Georgia for 20 years. You retired and began receiving your monthly pension on January 1, 2011, while you were still living in Georgia. Your pension is $2,000 a month. Because you did not contribute to the plan, your pension is fully taxable. On May 1, 2011, you moved permanently to California. Only your California source income is taxable by California, but while you are a resident, all of your income, regardless of source is taxable by California.
 
California does not impose tax on retirement income received by a nonresident after December 31, 1995. For this purpose, retirement income means qualified plans described in IRC Section 401, a tax-sheltered annuity (described in IRC Section 403(b)) or an IRA, including Roth IRA and SIMPLE.
 
If you are covered by an employer's retirement plan or if you file a joint return with your spouse who is covered by such plan, you may be entitled to only a partial deduction, depending on your income and you may be entitled to no deduction at all, depending on your income.
 
California currently does not conform to the federal AGI phase outs regarding IRA deductions.
 
For a SIMPLE IRA, an elective deferral may be made for up to a certain amount. For a traditional IRA, the most that can be contributed for 2011 is the smaller of $5,000 ($6,000 if over 60) or 100% of your compensation.
 
You are a nonresident of California who is under 50 years of age. During the year, you worked temporarily in California. Your California compensation is $1,000. Your allowable California IRA deduction is $1,000.
 
If your IRA contributions were partially or fully nondeductible, then the nondeductible contributions are not taxed when they are distributed to you.
 
California law treats a former nonresident as though the individual were a resident for all prior years for all items of deferred income, including IRAs.
 
Do not include in California basis a rollover contributions from an employer sponsored retirement plan, a rollover contributions from a self-employed retirement plan or a tax-sheltered annuity.
 
If you file long Form 540NR, your IRA deduction on Schedule CA (540NR), line 32, column E, is limited to the lesser of the IRA deduction allowed on your federal return or the compensation reported on your Schedule CA (540NR), Column E.
 
If you have used your Coverdell ESA for qualified educational expenses, contributions are not deductible, earnings are excludable and earnings are excludable.
 
An MSA (Archer Medical Savings Accounts) is a tax-exempt trust or custodial account setup in the United States exclusively for paying the qualified medical expenses of the account holder or the account holder's spouse or dependent (s) in conjunction with a high deductible health plan (HDHP).
 
Use federal Form 8853 to report general information about new MSAs, figure your MSA deduction or to figure your taxable distribution for MSAs.
 
In general, California law is the same as federal law regarding MSA contributions and deductions, but is different regarding the amount of additional tax on MSA distributions not used for qualified medical expenses. The additional tax for California is 10%.
 
A rollover from an MSA to an HSA constitutes an MSA distribution not used for qualified medical expenses. Therefore, the distribution is subject to California income tax and the additional 10% tax.
 
A Roth IRA is an individual retirement plan that differs from a traditional IRA in the way contributions and distributions are taxed.
 
In general, the taxable amount of your Roth IRA distribution will be the same for California and federal purposes. However, the taxable portion of your distribution may be different for California purposes than for federal purposes if you made a 1998 conversion from a traditional IRA ot a Roth IRA, elected to report the taxable portion of the conversion over 4 years or the federal basis of the traditional IRA was different from the California basis.

 

The tax due as the result of a conversion may be different for California purposes than for federal purposes if you made a conversion from a traditional IRA to a Roth IRA and the federal basis of the traditional IRA was different from the California basis.
 
You are a part-year resident of California. Your total self-employment income for tax year is $300,000, and the amount to be reported on Schedule CA (540NR), line 12, column E, is $100,000. Your Keogh deduction to be reported on Schedule CA (540NR), line 28, column E is $5,000.

 

The taxable amount of your Keogh distribution for California will be different from the federal taxable amount if you have a California basis to recover.

Once you have recovered your California basis, your distribution must be reported the same as for federal purposes. When you receive your distribution, none of the distribution will be taxed until you have recovered your California basis. The California treatment of Keoghs is generally the same as the federal treatment.

 
If you are a California resident and received a Keogh distribution attributable to your non-California self-employment income, your distribution minus your California basis is taxable by California.
 
California does not have taxes as the federal tax on excess accumulations, tax on excess contributions, or tax on excess distributions.
 
California has a tax on early distributions from IRAs, any qualified retirement plans, annuities, and modified endowment contracts. This tax is 2 1/2 %.
 
Early distributions are amounts you withdraw from your qualified retirement plan, annuity, or modified endowment contract before you are age 59 1/2.
 
The tax on early distribution is imposed in addition to any regular California income tax on the distribution.
 
The tax on early distributions does not apply to the portion of the distribution that is a return of basis, distributions due to death or to distributions made to unemployed individuals for health insurance premiums that apply only to IRAs).
 
If you enter into a prohibited transaction, your IRA ceases to be an IRA on the first day of the taxable year and you are considered to have received a distribution of the entire value of your IRA.
 
You must file Form FTB 3805P is you owe tax on early distribution from your IRA, other qualified retirement plans, annuity, or modified endowment contract, and you incorrectly have an exception code in box 7 of federal Form 1099-R, you owe a tax because you received distributions from a Coverdell Education Savings Account (ESA) in excess of amounts you spent for educational expenses or you received taxable distributions from an Archer MSA.
 
If you are paying tax for a previous year, you must complete that taxable year's version of Form FTB 3805P.
 
A tax-free distribution of assets from one qualified retirement plan that is contributed to another plan. You must complete this rollover within 60 days.
 
You may report your child's income on your California income tax return even if you do not do so on your federal income tax return. In order to this your child had only income from interest and dividends, your child had gross income for 2011 that was less than $9,500 and your child is required to file a 2011 income tax return.

 

 

 

 

 

 

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Forms you will need: Form 540, Schedule CA, and Form 1040.

Tax Return Situation 1:

Address information on W2 is current. Mr. Watson received Social Security benefits.

Mr. Watson paid $ 6,000 rent for all of 2011.

Mr. Watson's date of birth is April 6, 1944.

Get all basic information from form, including income information.

 

Tax Return Situation 2:

Complete a tax return:

Andy Brown (SSN 572-03-3300) lives with Samantha Garcia (SSN 578-58-8471) with whom he has three children. Andy and Samantha are not married.

The children are:

Name: SSN DOB
     
Anthony Brown 610-13-6440 8-16-1998
Amy Brown 604-13-6462 3-10-1997
Leticia Brown 611-12-4011 4-18-1995

Andy's Income:

Bank interest income $19.00
Unemployment compensation $220.00

Andy and Samantha agreed that she would take care of the kids and that Andy would support the family. 

Get all their basic information from the following W2, including income information.

 

1. Look at the Form 540 you prepared for Jose and Sara Cuevas. What is the amount on Form 540, Line 12?

Please Note:  If you filled out the answers directly on this page, please print this page or write down the answers before you proceed to submit them by clicking on "Assignment" in step 2 above.

Refer to

 

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Revised: 11/16/14