Foreign Tax Treaties and Foreign Tax Credits
California does not conform to the Internal Revenue Code as it relates to treaties that exempt certain income from federal taxation. The result is that, although foreign pensions and social security may be exempt from federal taxation under U.S. treaties, the income is subject to California tax.
Federally Exempt Foreign Pensions
Federally Exempt Foreign Pensions are taxable to California residents. The state’s position has been that tax treaties between the U.S. and other countries do not prevent California from taxing persons otherwise covered by such treaties. (Appeal of M.T. de Mey van Streefkerk, Cal. St. Bd. Of Equal., Nov. 6, 1985) In support of this position, the U.S. Supreme Court has ruled that tax treaties the U.S. enters into generally do not prohibit the taxing activities of sub-national governments.
Foreign Social Security
Only U.S. Social Security Benefits are exempt from CA taxation - There is no provision under either the California statute or the Internal Revenue Code to specifically exempt foreign social security from taxation by California. (Cal. Rev. & Tax. Code Sec 17087(a))
Foreign Tax Treaties and Foreign Tax Credits
Below are three important facts regarding Foreign Tax Treaties and Foreign Tax Credits:
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California does not recognize treaties between the U.S. Government and foreign countries and don’t allow a tax credit for foreign income taxes paid.
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Federal rules that may exempt certain foreign income from federal tax do not apply to California.
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Any foreign earned income excluded under IRC Sec 911 for federal purposes must be added back to California income on Schedule CA for California tax purposes.