Taxation of Pensions by Former Resident States

Posted by Lee Reams Sr. on

A frequent question is: what is the taxation of IRAs and qualified pensions by a taxpayer’s former state of residence?  The Congress in 1995 passed P.L. 104-95 (H.R. 394) that prevents states from taxing the pensions of former residents of any state received after December 31, 1995.  Prior to that date several states were taxing IRAs and qualified retirement plans on the premise they were based on income sourced to the state.  Benefits received from the following plans are not subject to out-of-state taxation (Title 4 Sec 114):

- IRC Sec. 401(a) trusts exempt from taxation under IRC Sec. 501(a)
- IRC Sec. 403(a) annuity plans
- IRC Sec. 403(b) annuity contracts
- IRC Sec. 408(k) plans
- IRC Sec. 414(d) government plans
- IRC Sec. 457 deferred compensation plans
- IRC Sec. 501(c)(18) trusts
- IRC Sec. 7701(a)(37) individual retirement plans including Roth IRA and SIMPLE
- IRC Sec. 401(k) plans)
- IRC Sec. 3121(v)(2)(C) plans (Nonqualified Deferred Compensation Plans) - if payments are made at least annually and spread over the actuarial life expectancy of the beneficiaries or if they are spread over at least a 10-year period; and
- Plans that are trusts under IRC Sec. 401(a) but exceed limits laid down in IRC Sec. 401(a)(17) and IRC Sec. 415.

      Another concern frequently raised over the same issue is if an IRA account remains with the same brokerage firm in the former state, will that have any effect on its taxation by the former state?  The location of the broker, the account custodian, will have no effect on the reporting or the taxation of the IRA.  The brokerage firm will (should) report the income (distributions) as income to the taxpayer’s resident state, not the former state of residence.

      Specifically for California taxation purposes, CA R&TC Section 17953 – Nonresident Beneficiaries reads as follows: Income of a nonresident beneficiary from an estate or trust, distributed or distributable to the beneficiary out of income from intangible personal property of the estate or trust, is not income from sources within this State and is not taxable to the nonresident beneficiary unless the property is so used by the estate or trust as to acquire a business situs in this State within the meaning of subsection (b) or (c) of Regulation 17952, or, in the case of royalties, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property, unless the estate or trust permits or licenses the property to be used in this State in the manner described in subsection (c) of Regulation 17952.

      Whether or not the executor or administrator of an estate or the trustee of a trust is a resident of this State is immaterial in so far as the taxation of income of beneficiaries from the estate or trust is concerned.