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California State taxes on Federal civilian disability and survivors benefits

Discussion in 'Taxation' started by LauraSummers, Mar 19, 2021.

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  1. LauraSummers

    LauraSummers Law Topic Starter New Member

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    This has been a very stressful situation I was made aware of while moving my mom. I found a letter of intent to levy her bank account from the state of California. My mother who has severe dementia documented and diagnosed by several doctors receives disability retirement through office of personnel management. She was a federal civilian employee for 20 years. She is currently 66. She has been receiving it since 1997. California State is currently threatening to levy her bank account stating she owes taxes on this. I thought CA didn’t tax State or Federal disability? She actually settled a lien on her home for the same issue. She also receives a federal survivors benefit via the office of personnel management from my late father who passed away in 1999. He was also a civilian federal employee for over 20 years. She has received this since 1999. Is this taxable in the state of California? After minimum retirement age? Even CA State Tax Franchise Board is now looking into whether they made a boo boo. Would the pay out from the lien on her home be recoverable?
     
  2. adjusterjack

    adjusterjack Super Moderator

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    You would be better off talking to a CA tax pro or tax attorney who understands CA taxation.
     
  3. army judge

    army judge Super Moderator

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    Some states seems to have figured out a way to tax almost EVERYTHING and EVERYONE.

    However, the elected leaders of those "tax it" states are working to create new tax schemes, as in "tax vehicle owners for every mile driven annually".

    Here, this addresses your question.

    California fully taxes income from retirement accounts and pensions at some of the highest state income tax rates in the country.

    Social Security retirement payments are exempt, but California has some of the highest sales taxes in the U.S.

    California is one of five states that offers no special exclusions or relief for pension income at tax time, according to U.S. News and World Report.

    That means residents of the Golden State have to pay taxes on both California pension income and income from other sources, including any out-of-state pensions.

    California and Retirement Taxes: Is the State Friendly to Retirees? — Eclectic Associates, Inc.

    If you need to know more about California's "tax schemes", I suggest you visit a CPA of your choice.
     
  4. Tax Counsel

    Tax Counsel Well-Known Member

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    California generally follows the federal rules for taxation of pensions and annuities that the federal government does, with one notable exception: California does not tax Social Security old age or disability payments while the federal government does tax a portion of your Social Security old age or disability if you have over a certain amount of other income.

    Aside from the Social Security exclusion, though, California taxes most other pension and annuities the same way the federal government does. See California Franchise Tax Board (FTB) publication 1005. Under federal law a portion of her disability payment is taxable. That amount is the portion determined to be in excess of her retirement contributions. See IRS Publication 721. That same rule applies in California too.

    Whether the FTB correctly determined the tax she owes would require looking at the returns she filed (if any), the Form 1099 that she got from OMB, and the tax the FTB determined to be due.

    If the tax was over collected she can seek a refund of the excess she paid if she files the refund claim timely.
     
  5. Tax Counsel

    Tax Counsel Well-Known Member

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    That's overly broad. Like the federal government, California does not tax the entire income from most pensions and annuities but rather the amount in excess of contributions. This is unlike the taxation of traditional IRAs, 401(k) accounts, and other tax favored retirement investments in which the entire amount of the distribution is indeed taxed.
     
  6. Paddywakk

    Paddywakk Member

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    Ah, California....glad I'm gone.

    I've also heard that CA is planning to tax those who have left for 10 years after their departure. Doesn't seem constitutional.
     
  7. Tax Counsel

    Tax Counsel Well-Known Member

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    While it likely would be unconstitutional, it's important to understand that the proposal has nothing to do with income tax. Rather it's a component of a proposed new wealth tax that would impose a tax on the worldwide wealth of California residents of .4% on the amount of wealth over $30 million. So, for example, if a resident had worldwide assets worth $50 million, the tax would be .004% x $20 million, for a tax of $80,000. That tax would be due every year on the assets held in that year. So this is essentially another kind of property tax meant to soak the rich, and to provide the rich even more incentive to leave that state should this bill ever pass. And because real estate property taxes are limited under California law, the bill does exclude real estate owned in California from the tax. Knowing that it would likely drive out some rich tax payers, the bill has a provision that would apply the tax for 10 years after a resident leaves the state, though the tax rate applied would decrease each year of the 10 years. The good news for wealthy Californians is that even the bill sponsors concede it's unlikely to ever actually make it into law. If it did, though, the 10 year tax on ex residents is pretty much guaranteed to be shot down by the federal courts.
     
  8. army judge

    army judge Super Moderator

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    It is very likely unconstitutional.

    Frankly, most (maybe all) taxation is unconstitutional.

    I doubt, however, that any court would ever make such a ruling.

    Its wonderful to be QUASI-FREE. LOL
     
  9. Tax Counsel

    Tax Counsel Well-Known Member

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    You may wish it to be so, but as a tax lawyer who has read the Constitution closely and extensively studied the rulings of the federal courts on the constitutionality of various taxes I can tell you the opposite is true: the vast majority of taxes are indeed constitutional. And I am certainly no fan of paying taxes. :D

    Article I, Section 8 of the federal Constitution sets out the express powers of Congress. The very first of its powers, in clause 1, is the power "lay and collect Taxes, Duties, Imposts, and Excises". However, it further specifies that "all Duties, Imposts, and Excises shall be uniform throughout the United States." Article 1, Section 9 of the federal Constitution then lays out express limits on the powers of Congress. As it relates to taxation, the Constitution has just two limitations: Clause 4 states: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken" And Clause 5 states: "No Tax or Duty shall be laid on Articles exported from any State."

    Thus the power of Congress to tax is quite broad. The Supreme Court has struck down a federal tax twice. The first, and most famous, instance was the Court's decision striking down the Income Tax Act of 1894. The case made it to the Court rather quickly, and in 1895 the Court held in Pollock v. Farmer's Loan and Trust, 157 U.S. 429, that the part of the Act that taxed capital gains on real estate was a direct tax. Because it was a direct tax, it had to meet the requirement to apportion the tax among the states by population, a task which is impossible to do with an income tax because the income of persons in the states varies. Since the capital gains provisions were an integral part of the Act the entire Act failed. The Congress and the States fixed that problem with the adoption of the 16th Amendment to the Constitution in 1913, which states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." You can see the amendment directly addressed the apportionment problem that the Pollock court raised and cleared the way for the passage of a new income tax act, also in 1913. That act set up what has become our modern federal income tax system.

    The second instance was the Supreme Court striking down the Harbor Maintenance Tax (HMT) in United States v. United States Shoe Corp., 523 U.S. 360 (1998). The HMT imposed a tax on the value of the goods that shippers run through U.S. ports. Because some of those goods are exported, the tax ran afoul of the Export clause (Article, 1, § 8, Clause 5) discussed above that bars taxes on exports of goods from the U.S. The government tried, and failed, to argue that the tax was really just a user fee.

    The Constitution places just one express limit on state tax taxation. Article 1, Section 10, Clause 2 prohibits states from taxing imports or exports. Apart from that, the States are permitted to enact pretty much any tax on their own residents as they wish without violating the Constitution, though the Court has limited the ability of the states to tax residents of other states by imposing a nexus requirement.
     

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