Three more questions from the mailbag this week. We’ll take a look at pensions, extensions, and putting money aside for 2009 taxes.
First, a Californian asks: If I retire with a government pension (Calpers) from California, will I have to pay California income tax on that pension if I become a resident of Nevada?
Would you think that the Franchise Tax Board would stoop to such a level as taxing retirees’ pensions when they left California? You detected the sarcasm, I hope.
Indeed, the FTB already tried and did attempt to tax out-of-state retirees under the theory that the pensions represent money earned in California and are, thus, taxable to California. However, there was an uproar from retirees who had escaped the Golden State. Congress responded by passing HR394 in 1996 (now Public Law 104-95); this was signed by President Clinton. States are now prohibited from taxing out-of-state retirees’ pensions.
Do be careful, though, and wait until you are domiciled outside of California before taking that distribution or California will tax you.
Next, I’m asked: I’m going to owe a lot in federal taxes next month, but money is going to be tight until June. What can I do to stave off Uncle Sam until then? (Luckily, I’m a resident of Texas and don’t have to deal with state income taxes.)
There are two choices you should discuss with your professional tax advisor. First, you could file your return, pay what you can, and arrange a payment plan for the remaining balance. If you owe $25,000 or less to the IRS a payment plan is generally automatically granted. A second option is to file an extension, pay what you can, and then file your return and pay the balance due in June.
Either way you will owe interest (it’s statutory) and a failure to pay penalty (0.5% of the tax due per month late). However, as long as you file an extension (or your return) you will avoid the failure to file penalty of 5% of the tax due per month.
The choice that’s best for you depends on your situation and the amount you owe. As I said, your professional tax advisor should be able to steer you in the right direction.
The final question for this week: I graduated from college in December, and did not earn any income in 2008. However, I just won $62,000 in a poker tournament this past week. Am I required to pay estimated taxes to the IRS? How much should I put aside for taxes this year? I live in Florida, if that helps you in giving me advice.
Congratulations on your win. And I’m glad you’re considering the tax impact of your victory. In the United States, gambling income is taxable, so you will owe federal income tax on your winnings. A rule of thumb is to put aside at least one-third of your winnings for taxes.
Exactly how much you will need depend on a variety of factors: your other sources of income, whether you’re a professional gambler or an amateur, your net poker winnings for the year, what state you reside in, your marital status and dependents, whether you will invest in a retirement account, etc.
Since your income was $0 in 2008 you do not have to make any estimated tax payments during 2009. (You never have to make estimated payments, but if you don’t and you are supposed to you will pay an estimated tax penalty when you file your return.) You also reside in Florida, a state with no income tax. If you were my client I’d advise you to take about $20,000 of your winnings and put it in a safe investment that can be cashed out early next year.
This week I may have made one, two, or perhaps all three of the questioners happy with my responses. I’ll have to see if I can keep that streak up next week.
