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State Income Tax Strategy - CA and WA
Old 07-04-2011, 12:41 PM   #1
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State Income Tax Strategy - CA and WA

DW and I are about to encounter a situation that may have significant state income tax consequences. I'm hopeful somebody here has encountered this or something similar, or can at least refer me to a more tax specific site for research.

The details:

Starting in the next month or so, we'll both be WA state residents. However, I'll be retaining my CA job for the foreseeable future. I'll have a residence in both CA and WA, renting a room close to my CA employer. However, I'll be spending over half my time physically in WA - probably closer to 75%. I'll be working my CA job both physically in CA, as well as remotely in WA.

My wife will be quitting her CA job, and likely picking one up in WA where she'll reside full time.

Question #1: With no state income tax in WA, what if any strategies might we take to minimize CA state income tax while I'm still employed there, and my wife is working in WA? Income will be heavily slanted on my side, if that makes any difference - likely 80/20 me/her. My guess is, all my CA income will be subject to CA income tax - but I'm hopeful, none of hers will be. I'm also not sure how we should file in this circumstance - separate/joint, for Federal and/or State.

Question #2: I'll be severing all ties with CA sometime next year, leaving my job and part-time residence in CA. Given my residency in WA, does all of our state tax liability to CA end upon my separation from employment and relinquishing my rental there? Reason being, we'll be drawing from 457 and 72t funds after my separation, and I don't want CA getting any $$ from those withdrawals.
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Old 07-04-2011, 01:14 PM   #2
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Originally Posted by Da Nag View Post
DW and I are about to encounter a situation that may have significant state income tax consequences. I'm hopeful somebody here has encountered this or something similar, or can at least refer me to a more tax specific site for research.

The details:

Starting in the next month or so, we'll both be WA state residents. However, I'll be retaining my CA job for the foreseeable future. I'll have a residence in both CA and WA, renting a room close to my CA employer. However, I'll be spending over half my time physically in WA - probably closer to 75%. I'll be working my CA job both physically in CA, as well as remotely in WA.

My wife will be quitting her CA job, and likely picking one up in WA where she'll reside full time.

Question #1: With no state income tax in WA, what if any strategies might we take to minimize CA state income tax while I'm still employed there, and my wife is working in WA? Income will be heavily slanted on my side, if that makes any difference - likely 80/20 me/her. My guess is, all my CA income will be subject to CA income tax - but I'm hopeful, none of hers will be. I'm also not sure how we should file in this circumstance - separate/joint, for Federal and/or State.

Question #2: I'll be severing all ties with CA sometime next year, leaving my job and part-time residence in CA. Given my residency in WA, does all of our state tax liability to CA end upon my separation from employment and relinquishing my rental there? Reason being, we'll be drawing from 457 and 72t funds after my separation, and I don't want CA getting any $$ from those withdrawals.
I think you may need good advice from a CA CPA. California is notorious for grabbing income tax from former CA employees who retire in other states.

Ha
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Old 07-04-2011, 01:35 PM   #3
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You will be stuck with paying CA income tax for your CA earnings. Your wife will have one year of being a part-time resident. As for whether it is better to file a joint return or not, comes down to how CA will handle the WA income of your wife.

I've never dealt with CA taxes but I have had experience with KY and LA. There you could claim the part-time residency income of your wife but exclude the non-in state income on a joint return. Keep good records of your wife's residency. She definitely needs to get a WA drivers license ASAP.

If you are not a resident of CA, you don't have to report income out of your retirement accounts. I would recommend you not take any withdrawals while you are a part-time resident.

As haha stated, you may have issues with CA going after any CA pensions. If you were a state worker in any form, they would be cutting the checks and be able to do whatever they can get away with. I've not heard of CA successfully going after private pensions. It seems to be really popular for retirees to leave high tax states after amassing a generous state pension. Then the state has trouble recouping a portion of their largess.
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Old 07-04-2011, 01:45 PM   #4
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What Ha says.

Our experience was that we kept getting Ca state income tax "requests" for several years after leaving the state and establishing residency and working in MA.

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Old 07-04-2011, 01:48 PM   #5
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Originally Posted by haha View Post
I think you may need good advice from a CA CPA. California is notorious for grabbing income tax from former CA employees who retire in other states.

Ha
Thanks - good point for others, but I'm well aware of that valid concern. CA evidently will go to great lengths to try and show one still has CA connections, but we'll be taking necessary steps to sever everything CA related once I cut the cord from my employer. No bills, bank accounts, vehicle registrations, etc. Longer term, CA can't touch our pensions/retirement accounts.

It's the interim period where I've still got CA ties that I'm primarily concerned about. If the options are not so simple, I agree - hiring an experienced CPA to help with that period is probably wise.
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Old 07-04-2011, 01:51 PM   #6
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Another thing to watch is that if you should ever return to CA, they will argue that your departure wasn't 'permanent' and will ask for taxes on all the years you were away.
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Old 07-04-2011, 01:52 PM   #7
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Our experience was that we kept getting Ca state income tax "requests" for several years after leaving the state and establishing residency and working in MA.
As did my Dad, who is in a similar situation as we'll be long term - CA pension, residing in another state.

They bugged him for three years...he sent them everything they asked for, each time. They eventually backed off and he didn't pay squat, but a PITA for sure.
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Old 07-04-2011, 01:53 PM   #8
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Another thing to watch is that if you should ever return to CA...
Other than as a tourist - ain't never, ever gonna happen.

But that's a different topic.
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Old 07-05-2011, 04:29 PM   #9
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Definitely worth talking to a CPA.

After I retired and moved to Hawaii from California, I exercised the last of my stock options. California promptly sent me a bill for 30K or so. Fortunately, my old CPA in California, pulled out the Supreme Court case which rule against CA. I mentioned in my letter the case along with an explanation. They actually backed off relatively quickly. Still it was comforting know both a CPA and the Supreme Court were on my side, something I won't have known without the CPA knowledge.
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