Is IRA distribution taxable in California, my non-resident state or only in Colorado, my resident state?

[cindy9]

If only taxable in Colorado, how is it treated on Non-Resident CA (540NR) form.

[MaryK1 · Accepted solution]

Retirement income is only taxed in your state of residence.  If you file a California nonresident return, the tax is determined using all of your income but you only pay on the California income. The percentage of CA income is applied to the determined tax.

[theresa_z]

How do I remove the Colorado retirement income to calculate the California income to determine the California tax?

[MaryK1]

Unfortunately, California uses all the income on your federal tax return (with adjustments) to determine the tax rate.  They then apply the tax rate to the California income (using a percentage of CA income).

[bkinouye]

I had a similar question, and found this in State of California Franchise Tax Board publication FTB-1031, "2018 Guidelines for Determining Resident Status".  On page 8, under IRA distributions, it states:

"IRA, Roth IRA, SIMPLE IRA, SEP, and Keogh distributions received after becoming a nonresident are not taxable by California if received after December 31, 1995."

To me, it's clear that once you become a nonresident, or you've always been a nonresident, the distributions you receive are not taxable by California.

[Critter]

Correct...they are not directly taxable HOWEVER like many other states, CA used your total annual income to compute your taxes and then prorate them...this cannot be changed. Review the return line by line to see how it plays out. 

[chadbye11]

This method that California uses to determine the tax in this manner seems to run afoul of US Code Title 4, Chapter 4, Section 114(a).  If the income from the IRA distribution was not involved in the calculation at all, the California tax is much lower than when the IRA distribution is used to calculate the tax, then removed by prorating the amount.  This results in a net effective tax on the IRA distribution.  (In my specific case, my California total tax was more than $1800 using the tax form as instructed, and was less than $700 if the IRA distribution was removed from my California taxes completely, so the effective net tax on my IRA distribution was over $1100).  According to US Code Title 4, Chapter 4, Section 114(a), my net tax on this distribution should be $0, so California is using some shady (and probably illegal) accounting practices to get around this law.