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In 2010, I converted a traditional IRA to a Roth IRA while a California resident and elected to take the income half in 2011 and half in 2012.

During 2011, I moved to North Carolina in the middle of the year.

How do I apportion the conversion between the old and new states? Is it just prorated on the days of residency in each state or does it all go to California since that was the state of residency at the time of conversion?

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I found this on the California Franchise Tax Board web at https://www.ftb.ca.gov/professionals/taxnews/2011/February/Article_4.shtml:

If a taxpayer chooses to defer to 2011 and 2012 and the taxpayer leaves California in one of those years how is the conversion treated for California purposes? Similarly, how is the conversion treated if a nonresident moves into California?

In Legal Ruling 98-3, Taxation of IRA Distributions Rolled Over to a Roth IRA Followed by a Change of Residence Status, we provided guidance as to the tax treatment of California residents who converted a traditional IRA to Roth IRA in 1998 and then change residence during the ratable period between 1999 and 2001, as well as the tax treatment of non California residents who converted an IRA to Roth IRA in 1998 and then become California residents in the period between 1999 and 2001. The analysis in this ruling remains applicable to the new deferral rule allowing taxpayers to report the income from the conversion of a traditional IRA ratably over the two years following the conversion.

Outbound taxpayers must include in gross income only those portions of the taxable distribution reportable under the two year rule before they became nonresidents. Under R&TC section 17952.5 the gross income of a nonresident does not include qualified retirement income including income from an IRA, received on or after January 1, 1996. R&TC 17952.5 prevents the imposition of California tax on the portions of the IRA distribution recognized after an individual becomes a nonresident.

California will allow for the proration of the taxpayer's income from the conversion based upon the number of days a taxpayer is within California during the two years of the proration. An individual who makes a rollover contribution from an IRA to a Roth IRA before January 1, 2011 and changes residency in 2011, must include in California adjusted gross income one half of the taxable portion of the distribution multiplied by a fraction, the denominator of which is the total number of days in the taxable year and the numerator of which is the number of days in the year in which the individual is a California resident.

If the taxpayer changes residency during the second year, the amount included in California adjusted gross income for the year of the change in residency is one half of the taxable distribution multiplied by a fraction, the denominator of which is the total number of days in the taxable year and the numerator of which is the number of days in the year in which the individual is a California resident.

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You don't mention the other state. When I changed states, I found that my (state) tax was equal to the higher state tax as a total, and paid just the prorated amount based on my time to the former state. In other words, the two states will both get their piece, it's not either/or.

  • Other state is NC, lower rate that CA. So you are saying even though I elected to defer CA income from the Roth conversion in 2010 to 50% 2011 and 50% 2012, CA does not get the whole amount and must share it prorated with NC? – WilliamKF Apr 11 '12 at 21:10
  • That's how it worked when I moved states. The lower (taxed) state took a pro-rated share and higher taxed state made my total state bill as if I were there all year. You need to sift through the forms for both states. Tough for anyone to know all state rules. – JTP - Apologise to Monica Apr 11 '12 at 21:13

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