California source income and taxes for someone living abroad

[pa74]

I am writing on behalf of my in-laws. They were Georgia resident and in 2019 moved abroad permanently. Their sources of income are social security, RMDs from retirement accounts, div/int from taxable account. 

They have listed our CA address as their mailing address for convenience. They have never lived in CA, don't have a driver's license here, no property, etc. Their only connection to CA is the mailing address they are using (my home) for their bank/retirement accounts/social security.

It is pretty clear that they are CA non-residents. However, will CA determine that their RMDs and div/int are CA source since they are using a CA mailing address? Are they required to file a CA non-resident tax return? 

[rjs · Accepted solution]

Using your California address on your in-laws' federal tax return does not make their investment income California source income if they don't actually live in California. They do not have to file a California tax return. However, using that address makes it look like they live in California, and the IRS does share information with the states. At some point they will almost certainly get a letter from the California Franchise Tax Board saying that they are California residents and have to file a California tax return. They will have to answer the letter with an explanation of the situation and give their actual foreign residence address, the date that they moved there, and where they moved from. It would probably make a more convincing case if they mail the response from where they are actually living.

Obviously it would avoid future problems if they use their actual foreign address on future federal tax returns. They could also file a change of address (Form 8822) with the IRS now, instead of waiting until they file their 2020 tax return next year. The "convenience" of having IRS mail go to your address might not be worth the inconvenience of having to repeatedly convince the FTB that they don't actually live there.

[pa74]

Thank you for that helpful response. Out of curiosity, for passive income like dividends/interest, if mailing address of brokerage/bank account doesn't determine "state source" what does determine the state to which it applies? I guess it would be place of residence, in this case, a foreign location? 

[rjs]

That's right. The source of investment income is where the recipient lives.

Note that if you move during the year, the source of investment income is where you live at the time that the interest or dividends are paid. So portions of the interest or dividends from one account could be sourced to different locations. The bank or brokerage just reports the total amount for the year. If you are, for example, filing part-year resident tax returns in different states, you have to allocate the income based on how much you received when you lived in each state.