Backstory, I am active duty military and my wife worked for JP Morgan Chase. She worked in our home of record state of Texas for 5 years and in California for 3 1/2 years. We needed to use the money when she left for another company last year so we did a complete balance early distribution. $1,200ish was withheld for CA taxes. It seems as if maybe the 2.5% early distribution fee for the state of CA is being applied to our return on Turbo Tax.
Do I owe any penalty for early withdrawal of 401K to California? I would think since we are non-residents that no tax or penalty would be owed to California
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Since the income came from work performed in California it is California sourced income, so taxes and penalties would apply to it just as if you were a California resident.
From what my return looks like so far, the taxes didn't apply just the penalty. So is it different for taxes vs penalty?
Yes. The entire distribution becomes part of your taxable income and is taxed at your income bracket. Then, there is a penalty added for taking it out younger than 59 1/2. The penalty is 10% federal and 2.5%% CA. Moving forward, these will help keep you on track:
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