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Non California Resident taxed on early 401k withdrawal

I am a non California resident but I own rental property in California.  My full time employer is not based in California so my entire 401K is money not sourced in California.  However in doing a hardship early 401k withdrawal last year.  The state looking at my federal return imposed their 2.5% tax on me.  I believe I should not have been taxed because the source of my 401k funds from my employment is not from California.  

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1 Reply
MonikaK1
Expert Alumni

Non California Resident taxed on early 401k withdrawal

As a nonresident, you pay tax on your taxable income from California sources. California-sourced income includes, but is not limited to:

  • Services performed in California
  • Rent from real property located in California
  • The sale or transfer of real California property
  • Income from a California business, trade or profession

The California Nonresident / Part-Year Resident tax return (Form 549NR) starts with your Federal AGI, then uses Schedule CA to make adjustments for items not taxable because they weren't California-sourced. Your regular tax rate on Form 1040NR is based on your California income.

 

If the early 401K distribution was subtracted from your California return, then California should not be imposing its excise tax on it.

If it was included in California income, the amount of the early distributions you must include in income for California purposes may differ from the amount reported on your federal return if the amount of contributions you deducted for California was different than the federal amount. See Instructions for Form 3805P.

 

If you prepared the return in TurboTax, review the return including worksheets to determine if you left the early withdrawal in California income. The excise tax is reported on California Form 3805P.

 

 If so, you can start an amended return and revisit the California interview to remove the income from the early withdrawal,

 

Here is how you can find the Worksheets:

 

In the desktop versions for TurboTax, you can click on Forms mode and look at the forms and worksheets.  

 

In Online TurboTax there is no forms function; the only way to see the worksheets is to pay for TurboTax (if you want to see the current year worksheets), then print the return as a pdf and look through the pdf to find the worksheet that you want to see.

 

To find your prior year documents including worksheets, from Tax Home, you can see your documents by scrolling down the main screen and clicking on Your Tax Returns and Documents. Select 2022 from the list of years. Click Download/print return (PDF). The worksheets appear after the forms in the PDF.

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