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Separation Pay and State Taxes


olevelo

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Does anyone have any experience with receiving separation pay and moving from a state with no taxes to one with? I've seen various discussions about people receiving their pay after the new year so they get to put it on the next year's taxes, which implies when you receive it is what matters, not when it was earned?

The issue I may have is I'm currently a Florida resident with no state taxes, but may take a job in California, and start before my separation date, or at least before I receive my final pay with separation pay. So looking at partial year tax laws, I would pay California taxes on the new job, and not my other military pay for the year...but what about the overlapping pay? Between separation pay, final check, and sold leave, we're talking about around $120k so I definitely don't want to give 10% of that to California!

Do I have to wait to start my new job until after I've received my final pay, or am I overthinking it?

On a somewhat unrelated note, I'm assuming that for my new Reserve job I'll now have to pay California taxes now?

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BLUF: Talk to an accountant.

This is an interesting question. From my understanding of IRS laws, you will probably not owe taxes on the separation pay due to your residency requirements. This would be a good question for an accountant though. I would wait to establish residency in California after you get paid. An example of this for me was when I was authorized to teach online classes on a satellite campus for a big university. Since the satellite campus was in a state that you had to pay taxes, I ended up having to give some of that money back. However, due to my residency in Texas, I did not have to pay taxes on my AD pay.

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Yeah, I figured the first answer would be to talk to an accountant! That's what the internet is for! :) One good thing is I found that California considers you a full year resident if you were a resident for more than 9 months...that's good because since my separation isn't until 30 April, it's easy to make the case I'm not a resident until at least 1 May. Although I could see them disputing that if I start a GS job before then! And again the concern is I won't receive my final/separation pay until mid-to-late May, so it gets into the "is it when you earned it or when you received it" issue.

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They're saying up to 20 days after separation date to get final pay and everything. Was your separation pay, final pay, and sold leave all lumped together? Finance said they would be, but seems like I've heard otherwise from others.

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They're saying up to 20 days after separation date to get final pay and everything. Was your separation pay, final pay, and sold leave all lumped together? Finance said they would be, but seems like I've heard otherwise from others.

AF Finance and DFAS are two separate clusters....

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So which year did the vsp pay go against tax-wise?

I called DFAS and I was told it will be on 2015s taxes but they took out the 28% before they gave it to me. The reason for this was because even though I separated at the very end of 2014, the money was not deposited into my account until 2015. Also, I did get all of it combined but only sold back a half day of leave.

Edited by Fud
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In general, California excludes military pay earned by non-residents from California taxes. To help you show California that your separation pay should not be taxed, you should make sure you are still a FL resident with DFAS and, if possible, wait until you have received your separation pay before you move to California. The California tax forms specifically ask you what day that you moved to California (not the day you applied for a license or registered to vote). You'll need to fill out a "part-year" California return and be sure that you list but exclude all of your military pay. You'll then be taxed on all money you earned working in California. I'm not an accountant, but many accountants in CA military towns are familiar with the forms and process.

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And again the concern is I won't receive my final/separation pay until mid-to-late May, so it gets into the "is it when you earned it or when you received it" issue.

Can't speak to California (though I suspect it's the same as Fed), but the general rule with the IRS is taxability date is determined when "constructively received"--i.e., when it hits your bank account.

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In general, California excludes military pay earned by non-residents from California taxes. To help you show California that your separation pay should not be taxed, you should make sure you are still a FL resident with DFAS and, if possible, wait until you have received your separation pay before you move to California. The California tax forms specifically ask you what day that you moved to California (not the day you applied for a license or registered to vote). You'll need to fill out a "part-year" California return and be sure that you list but exclude all of your military pay. You'll then be taxed on all money you earned working in California. I'm not an accountant, but many accountants in CA military towns are familiar with the forms and process.

The problem is I'm already in California as I'm stationed here, and won't be moving if I take the job the here. I could wait to start the new job after I get paid, but then I'm losing out on potentially up to two months of pay at the new job! This is pretty dumb...

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Not sure if this is still the case, but...

I had an uncle that retired from the Air Force in CA. Even if he moved, his retirement was going to get CA state taxed for the rest of his life. My takeaway was never retire in CA.

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I should clarify that I live here now, but I haven't done any of the "become a resident" stuff like registering vehicles or drivers licenses. That being said, from what I can tell, California considers you a resident when you move here for "non-temporary purposes". But none of their information or examples cover a case where a military person is already here as a non-resident and then stays.

On the retirement front, yes that's true, but it's also true in every other state. I have no desire to give any money to this state, but sometimes your options are limited if there's certain jobs you want.

Oh I just realized what you meant about the retirement. That's not true. If you're no longer a resident of California then they can't tax you. The issue is if you maintain any residency here then they'll come after you. And they make it clear that it's very easy to still have a claim to residency here. Owning rental property here and then moving away isn't a great idea.

Edited by olevelo
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Olevelo,

I live in CA and separated while living in CA. However, I was an IL resident during my active duty time. The State of CA Franchise Tax Bureau will stake their claim to your separation pay and every other penny you made while you were living in this god forsaken desert. I had to fight them every year for 3 years of active duty service, and they did not get one penny. Just make sure the bottom of your W-2 or 1099 says FL for state of residence and you got yourself a clean kill. It's a pain in the ass, and the FTB is the most aggressive collection agency I have EVER seen. Get a good accountant and expect the FTB to try and fist you. If you're in So Cal, PM me if you want to use my guy although he'll probably be busy for the next few weeks.

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Wow thanks for the first hand info. What was their basis for trying to collect your active duty pay?! It's very clear they don't have a right to that. For the separation pay, did you overlap with a civilian job at the end of your active duty time or did you have a gap so that your residency wouldn't start yet, or at least there was no overlap in pay that could be taxed? Thanks!

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Not sure if this is still the case, but...

I had an uncle that retired from the Air Force in CA. Even if he moved, his retirement was going to get CA state taxed for the rest of his life. My takeaway was never retire in CA.

That can't be true.

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That can't be true.

Actually, California tried to do that not so long ago (90s?). It went even further than that: their argument was that any income earned in CA was "California sourced" (which is generally true), and, while one's military income was exempt (for non-residents), one's retirement income was not. Soooo (by CA's reasoning)... if, during a (say) 20 year career you were based in CA for 5 years (25% of the time), then 25% of your retirement check was "California sourced" and would therefore be taxable by CA--no matter where you lived. That went to 100% if you lived in CA, of course, subject to normal credits for taxes paid to other states....

That got shot down rather quickly in Federal Court (I don't recall how high it got, I don't think it made it to the Supreme Court).

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On a related note, for anyone who separated during the year and then joined the Guard or Reserves, did you receive separate W-2's or one with all of your military pay? My concern is making sure they're separate because my Reserve pay will be as a California resident (if I stay). And also if I happen to drill in May, prior to receiving my final pay, who knows how DFAS will screw that up!

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On a related note, for anyone who separated during the year and then joined the Guard or Reserves, did you receive separate W-2's or one with all of your military pay? My concern is making sure they're separate because my Reserve pay will be as a California resident (if I stay). And also if I happen to drill in May, prior to receiving my final pay, who knows how DFAS will screw that up!

I did just that. Got a W-2 for my AD pay, and a W-2 for my ANG pay. It was classified as a Reserve Component W-2, so I would think it's the same process for the Reserves.

My AD W-2 showed my previous state of residence, TX, while the ANG one showed my new state, WA.

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I did just that. Got a W-2 for my AD pay, and a W-2 for my ANG pay. It was classified as a Reserve Component W-2, so I would think it's the same process for the Reserves.

My AD W-2 showed my previous state of residence, TX, while the ANG one showed my new state, WA.

AD W2 as FL resident and Reserve one in different state once I got off the "never pay state taxes" good deal.

Worked quite well and was very easy to file taxes. Didn't get sep pay, so no info on that part.

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