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Old 05-31-2009, 11:02 PM
 
Location: Northern CA
265 posts, read 563,793 times
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Smile Retiring to another state-state taxes

I'm starting to research just where to retire. Have several years before that occurs (6 or 7). We've already made the decision to leave California-for a number of reasons-but that's not the subject of this thread.

My wife and I are both public emplyees (local government) and, god-willing, will retire with Public Employees (PERS) pensions. My question is will the pensions will be taxed by the state of California? Or will we merely be taxed by the state where we'll be residing? Anyone got any experience with that? I do understand the advantage of states with no state income taxes.

Thanks for the advice.
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Old 06-01-2009, 01:55 AM
 
27,209 posts, read 22,654,172 times
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i would do a search as this was discussed many times and its not just about no state income taxes..some states with no state income taxes can be very expensive to live as they still need to generate revenue in other ways...

one way or another they have their hand in your pocket, its just some states are like little pick pockets and you dont notice it looking at a tax form
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Old 06-01-2009, 03:28 AM
 
Location: Knoxville, TN
2,173 posts, read 4,715,005 times
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Quote:
Originally Posted by Jaybee View Post
My wife and I are both public emplyees (local government) and, god-willing, will retire with Public Employees (PERS) pensions. My question is will the pensions will be taxed by the state of California? Or will we merely be taxed by the state where we'll be residing? Anyone got any experience with that? I do understand the advantage of states with no state income taxes.

Thanks for the advice.
I don't believe even California has figured out how to tax people who don't live or work there. Once you cross the border, you're free.
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Old 06-01-2009, 05:05 AM
 
Location: Northern VA
4,008 posts, read 2,991,536 times
Reputation: 3337
One resource that I've found to be helpful is:

Taxes by State

For California, it says:
"Retirement Income Taxes: Social Security and Railroad Retirement benefits are exempt. There is a 2.5% tax on early distributions and qualified pensions. All private, local, state and federal pensions are fully taxed."
However, there are a number of states that do not have a state income tax and there are others who give tax breaks to retirees. There are also some states that do not tax federal government pensions (I'm a federal retiree) at all - I don't know (you'd have to look) if any states exempt local government retirees from their state income tax.

As to the question of whether you will have to pay state income tax on your California pension if you move to another state, I checked the FAQ section of the State of California Franchise Tax Board and found this:

Quote:
I did not live in California. Do I have to file a return?

You are required to file a Nonresident or Part-Year Resident Income Tax Return (Long of Short Form 540NR) with California if you have income from California sources, such as, rental income, income from the sale of property, or partnership income in 2008 and you are:
  • Single with a total income from all sources of $14,845 or more
  • Married with joint income from all sources of $29,690 or more.
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Old 06-01-2009, 07:06 AM
 
Location: Forests of Maine
21,319 posts, read 26,126,562 times
Reputation: 8429
There are many facets to this.

Generally the state where you reside will be where you file your income taxes. Unless you maintain a business activity in Ca; then no matter where you travel to you would be filing a 'non-resident' tax form in Ca.

Cost-of-living is a good factor to look at for any retirement area.

When discussing state income taxes, keep in mind that most states who do charge income taxes. Also most states have some form of standard deductions and exemptions.

For example, I retired to a state that does have income taxes. However our AGI has been below the combined standard deductions and exemptions. So we pay no income taxes, even though we live in a state where they do charge income taxes.

Another thing to consider is property taxes and sales taxes. Again every state is different. One tax might be high while the next tax might be low.

There are websites that try to do side-by-side comparisions. However if you look closely at those comparisons they fall apart.

Each of us is different. I might buy a $2million beach house and complain of the taxes; while you might buy a small farm and have very low taxes.

Even websites that try to make a comparison based on the average income, make assumptions that rarely fit.

I retired to a state known for it's high cost-of-living, due mostly to it's high taxes. But my pension is below their income tax trip-wire, and our lifestyle avoids most of their other tax trip-wires. So we live here paying very low taxes.

It really is an individual formula which will be different for each person.

If you are thinking of a place, try to imagine yoruself living there. With your projected retirement income, what exactly would your taxes have been last year? Are there programs that reduce yoru taxes? What do they base their property taxes on? and what programs do they offer to reduce your property taxes?

For example: We like living in a forest. Maine has programs for forested land. Keep your land in forest and the taxes are remarkably low. So for us it is a good fit. We live in a forest with a river out our back door, boats in the water. Our taxes run about $1.05 per acre per year. So 100 acres of forest costs $105 each year.

Each situation is different.

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Old 06-01-2009, 09:02 AM
 
Location: DC Area, for now
3,517 posts, read 8,258,854 times
Reputation: 1984
Quote:
Originally Posted by GreenGene View Post
One resource that I've found to be helpful is:

Taxes by State

For California, it says:
"Retirement Income Taxes: Social Security and Railroad Retirement benefits are exempt. There is a 2.5% tax on early distributions and qualified pensions. All private, local, state and federal pensions are fully taxed."
However, there are a number of states that do not have a state income tax and there are others who give tax breaks to retirees. There are also some states that do not tax federal government pensions (I'm a federal retiree) at all - I don't know (you'd have to look) if any states exempt local government retirees from their state income tax.

As to the question of whether you will have to pay state income tax on your California pension if you move to another state, I checked the FAQ section of the State of California Franchise Tax Board and found this:
I do not trust that site. It looks good but fails to report the actual tax burden where I live (by quite a lot) so I don't trust it for anywhere else.

None of this addresses whether a state/local pension is taxed by the state in which it was earned regardless of where the pensioner resides. Some states were doing this or trying to. It is a very good question when you work for a local or state jurisdiction. Unfortunately, I don't know the answer.
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Old 06-01-2009, 10:02 AM
 
Location: Forests of Maine
21,319 posts, read 26,126,562 times
Reputation: 8429
Quote:
Originally Posted by Tesaje View Post
I do not trust that site. It looks good but fails to report the actual tax burden where I live (by quite a lot) so I don't trust it for anywhere else.
I agree with you.

That website is very misleading.



Quote:
... None of this addresses whether a state/local pension is taxed by the state in which it was earned regardless of where the pensioner resides. Some states were doing this or trying to. It is a very good question when you work for a local or state jurisdiction. Unfortunately, I don't know the answer.
Might I suggest call a local tax attorney for an appointment.

Pay him his $150/hour fee, and ask him.

He would be the expert in your state. He is the one who could tell you 'for sure'. And from that point you can plan your future.

In my mind, it would be well worth knowing, and worth paying a local pro to know for sure.

[edit] Ooops, also, it would be worth the effort of having this guy's business card, and him having a file on you, just in case you do have any future issues.

Last edited by Submariner; 06-01-2009 at 10:03 AM.. Reason: added a tid bit.
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Old 06-01-2009, 08:25 PM
 
Location: Northern VA
4,008 posts, read 2,991,536 times
Reputation: 3337
Quote:
Originally Posted by Tesaje View Post
I do not trust that site. It looks good but fails to report the actual tax burden where I live (by quite a lot) so I don't trust it for anywhere else.
I wouldn't trust the site to be 100% accurate, but it gives a person some idea of what to expect. The best thing about it is that it gives links to official state tax websites. To find out exactly what the tax burden will be in a specific state for me and my wife, I go to the source - whatever the official department of taxation is for that state.

Quote:
Originally Posted by Tesaje View Post
None of this addresses whether a state/local pension is taxed by the state in which it was earned regardless of where the pensioner resides. Some states were doing this or trying to. It is a very good question when you work for a local or state jurisdiction. Unfortunately, I don't know the answer.
Well, from the California site I linked to:

"You are required to file a Nonresident or Part-Year Resident Income Tax Return (Long of Short Form 540NR) with California if you have income from California sources, such as, rental income, income from the sale of property, or partnership income in 2008....."

A California local government pension certainly sounds like income from a California source to me! Fortunately, the website also gives a phone number to call for answers to this type of question.
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Old 06-02-2009, 06:07 AM
 
Location: DC Area, for now
3,517 posts, read 8,258,854 times
Reputation: 1984
Quote:
Originally Posted by GreenGene View Post
I wouldn't trust the site to be 100% accurate, but it gives a person some idea of what to expect. The best thing about it is that it gives links to official state tax websites. To find out exactly what the tax burden will be in a specific state for me and my wife, I go to the source - whatever the official department of taxation is for that state.



Well, from the California site I linked to:

"You are required to file a Nonresident or Part-Year Resident Income Tax Return (Long of Short Form 540NR) with California if you have income from California sources, such as, rental income, income from the sale of property, or partnership income in 2008....."

A California local government pension certainly sounds like income from a California source to me! Fortunately, the website also gives a phone number to call for answers to this type of question.
I filled out tax forms for the states I am interested in to see ...

I don't think it is necessarily the same thing. Most states require you to pay taxes on income earned in that state - the examples are for business income. Pensions are not considered income in the same way, so you need to have a direct ruling on how they handle it. Pension money is reported differently and has different rules applied to it. They are not considered earned income.
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Old 06-02-2009, 07:22 AM
 
Location: Forests of Maine
21,319 posts, read 26,126,562 times
Reputation: 8429
Quote:
Originally Posted by GreenGene
...
Well, from the California site I linked to:

"You are required to file a Nonresident or Part-Year Resident Income Tax Return (Long of Short Form 540NR) with California if you have income from California sources, such as, rental income, income from the sale of property, or partnership income in 2008....."

A California local government pension certainly sounds like income from a California source to me! Fortunately, the website also gives a phone number to call for answers to this type of question.
In Federal IRS thinking, there exist two types of incomes. 'Active' and 'Passive'.

An Active income is from a business activity where you do some level of the 'work', and if the business failed you would share some level of the loss [it is considered 'at risk'].

A Passive income is from some activity where you know nothing of what they do, they simply send you a check in the mail.

If you own rental property for example. You might be the manager of it, so you make all of the decisions. Or you might hire a manager, but you still make decisions of when to spend money on planned repairs, or you might specify rent levels you wish. So long as you actively keep a hand in the running of the business, then it is an 'active' activity for you.

If you 'owned' rentals, but really you put money into a pool controlled by three lawyers. They used that money to buy the rentals, they hire a manager, they make decisions, and they send you a check every month. In this case it is a 'passive' activity.

Generally when you have rental income it is an 'active' activity.

When you sale real estate, it was an 'active' activity. It was your real estate and you sold it.

When you are a member of a partnership, you are a partner, so you contribute to the decision process, it is an active activity.



The income sources that you listed were all 'active' activities.

A managed pension plan is a 'passive' activity. It could be called a "New York State Civil Workers pension" for example, but that does not mean that it is being administrated by anyone in New York. The firm who manages it could be in Kansas. And it would likely be investing in the stock market [via mutual funds].
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