California does not tax distributions from IRAs, Qualified Pension, Profit Sharing and Stock Bonus Plans of non-residents.

Prior to 2002 taxpayers who became residents received a stepped-up basis for annual contributions and earnings on retirement plans due to the fact they were non-residents when the contributions were made. But since 2002 the law treats taxpayers as though they were residents for all prior years for all items of deferred income, which includes IRAs.

Taxpayers will be allowed a basis for contributions that were actually made, which would not have been allowed under California law had they been a resident.

California did not conform to federal law regarding IRA contributions from 1982 to 1986. During these years, California limited the deduction to 15% of compensation or $1,500, not the federal amounts of 20% or $2,000. For tax years 2007 through 2009, California did not conform to the higher federal phaseout amounts that became effective as of 2007. However, beginning with 2010, California does conform to the federal phaseout amounts.

We have provided a table summarizing the various limitations, changes and differences between Federal and California law since the inception of the Traditional IRA. For Federal tax purposes, a basis in an IRA could not be possible until the advent of the non-deductible IRA in 1987. However, because of the delayed conformity to Federal rules and different limitations, a California basis could have been established as early as 1975. See basis chart in IRA chapter 04.05.

The federal CARES Act included a provision allowing an eligible taxpayer to withdraw up to $100,000 from an IRA in 2020 that would be penalty free (for those under age 59½) and the income would be spread over three tax years, 2020, 2021 and 2022. The taxpayer could elect to have all of the distribution taxed on the federal return for 2020. Further, the taxpayer could redeposit up to the amount of the distribution during 2020-2022 and the recontribution would be treated as a rollover, making the distribution non-taxable, up to the amount redeposited. California conforms to these provisions, but the taxpayer could make a different election for federal and California.

What is the treatment if the taxpayer’s residency changes during the 3-year period? The income is to be allocated to California based on the residency period. Thus, in the year residency changes, a part-year California return is filed, and the IRA income to report will be based on the number of days spent in California that year divided by the total number of days in the year. The portion of the distribution attributable to the non-residency period is not taxable by California.

A taxpayer who becomes a California resident in 2021 or 2022, and who had no 2020 filing requirement for California, must follow the federal method of reporting for California.