California Differences - Pensions & Annuities
California generally conforms to Federal treatment of pensions. However, foreign equivalents to Social Security are generally taxable to CA.
Taxation of Out-of-State Pensions
P.L. 104-95 prevents states from taxing the pensions of former residents of any state received after December 31, 1995 (R&TC 17952.5). Benefits received after 1995 from the following plans are not subject to out-of-state taxation:
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IRC Sec. 401(a) trusts exempt from taxation under IRC Sec. 501(a)
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IRC Sec. 403(a) annuity plans
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IRC Sec. 403(b) annuity contracts
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IRC Sec. 408(k) plans
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IRC Sec. 414(d) government plans
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IRC Sec. 457 deferred compensation plans
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IRC Sec. 501(c)(18) trusts
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IRC Sec. 7701(a)(37) individual retirement plans
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Pensions meeting the “substantially criteria” paid to partners. ***,
P.L. 104-95 also limits deferred compensation (including IRC Sec. 401(k) plans) and other distributions from two types of nonqualified plans from out-of-state taxation:
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IRC Sec. 3121(v)(2)(C) 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
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Plans that are trusts under IRC Sec. 401(a), but exceed limits laid down in IRC Sec. 401(a)(17) and IRC Sec. 415.
*** H.R. 4019 signed into law in 2006 specifically includes payments by partnerships to partners retroactive to pension payments received after 12/31/95. This bill was in response to a position taken by the State of New York that the provisions of Code Sec. 3121(v)(2)(C) apply only to employees, not partners, and the state was attempting to tax pension income of “out-of-state” partners.
Taxation of Canadian RRSPs and RRIFs
These Canadian retirement plans do not qualify as IRAs under either federal or California law. California does not recognize the U.S.-Canada treaty provision allowing an election to defer taxation of the earnings of these plans until distributions are received. Thus, the interest, dividends or capital gains earned by these plans annually are taxed by California and are an adjustment on Schedule CA. The amount taxed becomes the taxpayer’s basis in the plan for CA purposes and will not be taxed again when distributions are received.