California taxation of community property pension 50% allocated to non-resident spouse in Nevada.

[jdeangelis]

W is a resident and domiciled in CA, H is a resident and domiciled in NV, and W retired in CA and has a State defined benefit pension payable monthly.  All of the pension is community property.  Is the pension payment (1) "California sourced", like wages, in which case all of the pension is taxed in CA (50% to W and 50% to H as CA sourced income on 540-NR), or (2) is the 50% allocated to H in NV subject to 4 U.S. Code § 114 and not subject to CA tax?  No authority addresses the issue.  Conversely, if H takes a community property pension distribution in NV, does CA allocate 50% of the community property pension to the CA resident W spouse (as community property income) who pays tax on it?  There is no authority for this either.  I suspect CA wants it both ways; (i) tax NV spouse on CA spouse pension as "CA sourced" (i.e., 100% taxed), and (ii) tax CA spouse on 50% of NV spouse pension distribution as community property income (here, 50% taxed in CA).  Thoughts?

[TomD8]

The 50% allotted to H is not taxable by CA, because CA non-residents are not taxed by CA on pension income.

See Example 3 on page 12 of this CA tax publication:

https://www.ftb.ca.gov/forms/2023/2023-1031-publication.pdf

All the pension income allotted to W is taxable by CA, since CA residents are subject to CA income tax on all their income.

[jdeangelis]

Thank you for the response, and it makes sense--pension benefits 50% allocated under community property laws to a nonresident should not be taxed in CA under 4 USC Section 114.  Example 3, however, involves two nonresidents in a community property state, so after the 50-50 allocation, both would be sourced to a non-CA jurisdiction and CA could not tax either because of 4 USC Section 114.  In my example, W is a CA resident and the recipient of the pension payment (though subject to community property 50-50 allocation - 1/2 to NV).  If the payment to W was wages for working in CA, there would be no question, it would be 100% taxed in CA: 50% to W (taxed as a resident) and 50% to H (taxed as a non-resident because the income is sourced to CA - like rental income from CA).  I cannot find any examples or authority supporting how CA would tax H on his 50% community property share of W's pension payment --i.e., does CA take the position that H's 50% pension share is (i) CA sourced like wages and is taxable in CA and hence not subject to 4 USC Section 114, or (ii) is not CA sourced (like stock sales or income from personal property) and hence is subject to 4 USC Section 114 and not taxable in CA.  California Office of Tax Appeals nonprecedential opinion 2019-OTA-171 foot notes 2 and 3 suggest that 50% of non-resident W's pension payment should be allocated and taxed to resident H's CA taxable income under community property laws--and this too makes sense.  Unfortunately, I cannot find authority for the opposite--pension received by CA resident with 50% allocated under community property laws to non-resident spouse.  

[TomD8 · Accepted solution]

I should have been clearer, but I cited Example 3 because of the footnote that states *California nonresidents are not taxed by California on pension income.  That statement is from a California Tax Board publication, so it is authoritative.

Pensions are community property if they were earned in a community property state during the period of the marriage.  If pension is community property, then 50% of the pension income belongs to each spouse.  In your example, H is a non-resident of CA.  Therefore his share of the pension income is not taxable by CA.  W is a resident of CA, therefore her share of the pension income is taxable by CA.

Another source:

"California does not tax the IRA distributions, qualified pension, profit sharing, and stock bonus plans of a nonresident." 

https://www.ftb.ca.gov/forms/misc/1100.html

[jdeangelis]

TomD8: thoughtful response.  Thank you.