Retirement Taxes

[Goofy Foot]

Hey winni-

Yep, mostly kite and snowboard now.

Stay Crazy- Goofy

[maxingout]

I lived and worked overseas for 28 years. I filed my taxes every year, because you can't claim the foreign earned income exclusion unless you file for the exclusion. It's a big mistake not to file, even if you don't owe any tax when you file. The IRS may deny you the exclusion when they catch up to you.

If you don't want to pay state taxes, you need to move to a state that has no income taxes well before you retire, and establish your legal residency in that location. Even if you do that, some states, like California, will send you a tax bill if your retirement comes from wages that you earned while living in California. And if you have a house in California, you are toast, because they will put a tax lien against your house if you don't pay the taxes.

It is extremely important to set things up properly, or states will come after you for back taxes, and if you own any property in that state, they will take it from you in order to get their taxes.

Some countries do not tax you on worldwide income if you sell your property before going overseas. Each country works differently in this matter.

[onestepcsy37]

therapy, i've looked into various tax proposals, including the 'fair' and the 'flat' tax.

for those who aren't familiar with the 'fair' tax, think of it as a sales tax. an enormous sales tax. proponents say it would be about 28 percent, if i remember right. but others who have looked at it say that, just using basic gdp data that is widely available, it appears that the tax would actually be about 50 percent, or more. and it would be on EVERYTHING - food, medicine, housing, everything. that would affect the middle class and the poor more than the rich, because those classes tend to spend most of their income on goods and services. the poor would be helped by giving them a monthly stipend to offset the costs, but the middle class would not. the rich do not spend most of their money on daily living expenses and would benefit the most. before you think i'm trying to start class warfare, let me just say that i'm totally pragmatic about this and everything else i do. i just want the facts. i think it would ultimately lead to an enormous underground economy, since the tax saving would go from the current 'paltry' 6 percent or so to maybe 50 percent.

i could go on and on about the 'fair' tax but theres plenty of info, pro and con, on the internet.

the 'flat' tax has a bit more appeal to me, if, and only if, all exemptions are eliminated. i've read various tracts on this and have seen estimates of as little as 10 percent of total income to as much as 20 percent.

and keep in mind that both tax proposals are aimed at the federal income tax. it would not change state or local income taxes, property taxes, state and local sales taxes, etc.

i did get one good idea from you, however. if we did have a fair tax, it would benefit long term cruisers the most. i would continue to collect my income from american sources but would sail to and reside in foreign countries, where my goods and services could be purchased at non 'fair' tax prices....

[UWOA]

Originally Posted by maxingout

Even if you do that, some states, like California, will send you a tax bill if your retirement comes from wages that you earned while living in California.

Actually, it doesn't matter if you qualified for retirement in that state, it's where the benefit originates from; i.e. if your retirement check originates in California from a retirement earned or qualified there, and is deposited in an out-of-state account where you are resident, California might have a claim that you 'earned' the money 'in-state'. However, if you earn a retirement in one state and every part of the retirement 'pay' transaction occurs out-of-state; they can't make that claim. For example, you earned a defined benefit pension from Illinois, but the Illinois pension is paid as a direct deposit by the pension trust from a Missouri bank/financial institution to an account you have with a bank in Florida where you are now a Florida resident, Illinois cannot come after you for the income earned. Missouri has no claim for income because it is a transfer of funds in trust, and Florida has no state income tax. The only income tax you would be liable for, in this case, would be federal income tax.

It's why a lot of defined benefit pensions actually transact their business outside of the state where the pension was earned (and why a lot of people with defined benefit pensions retire to Florida or Texas).

[osirissail]

Trying to ignore the off-subject discussion of different tax schemes versus the reality of taxes today is difficult. Just let me sneak this in - Foreign countries, especially little ones do not have individual tax schemes as they really do not know who is living on the island and most earnings are done in cash passed hand to hand. Where these little countries get their income is from import duties and sales taxes or VAT taxes. These sales taxes can normally reach 30% to 40% of the sales price or more. So everything you purchase in the little country is very highly taxed.
- - Vessel in Transit exemptions on boat parts/services are not uniformly observed with some countries not allowing V-I-T at all and some allowing it but taxing the transportation and insurance associated with the shipment. They get you coming and going.

[Charlie]

Originally Posted by UWOA

Actually, it doesn't matter if you qualified for retirement in that state, it's where the benefit originates from; i.e. if your retirement check originates in California from a retirement earned or qualified there, and is deposited in an out-of-state account where you are resident, California might have a claim that you 'earned' the money 'in-state'. However, if you earn a retirement in one state and every part of the retirement 'pay' transaction occurs out-of-state; they can't make that claim. For example, you earned a defined benefit pension from Illinois, but the Illinois pension is paid as a direct deposit by the pension trust from a Missouri bank/financial institution to an account you have with a bank in Florida where you are now a Florida resident, Illinois cannot come after you for the income earned. Missouri has no claim for income because it is a transfer of funds in trust, and Florida has no state income tax. The only income tax you would be liable for, in this case, would be federal income tax.

It's why a lot of defined benefit pensions actually transact their business outside of the state where the pension was earned (and why a lot of people with defined benefit pensions retire to Florida or Texas).

What you say is correct except your choice of verbs. California can and does come after you for all of those taxes. They may not be in the right but it is up to yo to defend yourself. As an example of this When my wife and I moved back from Montana to California the IRS sent us a little nastygram: You are on title to a house in California. There is a loan on that house. In order to qualify for that loan you had to earn $XXXX much money. You owe us $XXXX + penalties and interest for that income.

We wrote them back a letter and told them that my wife had not worked in Kalifonia for three years and that is why we didn't file a Kalifornia tax return. Besides her ex got the house in the divorce.

Kalifornia replied we don't believe you you owe us all of that in taxes. We sent them a copy of the divorce decree. They said that that wasn't good enough.

We asked them what they wanted. They replied that they weren't going to tell us but it was up to us prove to them that she hadn't worked in Kalifornia.

In the mean time she had her wages garnished by the People's Republik of Kalifornia.

I finally sent them a copy of the deed that had transfered her interest in the house that had been filed with the clerk and recorder. I also told them that this was harrassement and threatened to take them to court with some legal terms that a friendly attorney had given to me. I don't think the threat carried any weight but they were so obviously wrong that they decided to drop the issue. I also sent them a bill for the time it had taken me and the phone calls and attorney fees.

Kalifornia never responded.

So while you are right they have no legal basis to tax you the laws in Kalifornia are so unrepresentative of reality they will attack you and let you try and figure out the law.

Another bit of trivia that I have heard but not confirmed is that anyone with a bank account in Kalifornia is considered a resident even if you haven't stepped foot in the state for three years. A friend was in that situation and the state wanted to collect its state income tax from him.

You need to be careful with the People's Repulik of Kalifornia where you are guilty until you prove yourself innocent.

[UWOA]

IRS is federal; California Department of Revenue is the state taxing agency ... you said the IRS came after you ... and while it is true that they (California) may claim you owe taxes, 'coming after you' is the proof of the matter I was speaking of ... and as you inferred later on they did not meet that burden of proof.

Residency is a legal concept well-defined. If you don't believe me, consider federal legislators who fly home to vote in elections ... they have residences in more than one location, but are 'resident' in the state where they vote. They may have accounts and/or investments in several locations, but incur taxes on those monies as passive income that are treated in a different manner ....

And, while you may consider that in 'K'alifornia, you are guilty until proven innocent, American jurisprudence doesn't work that way, the feds, for one, wouldn't allow it to happen -- i.e. constitutonal protections, and secondly there are well founded legal concepts such as stare decisis that would invalidate such an approach ....

[Doodles]

Originally Posted by Charlie

Kalifornia never responded.

I'm shocked.

Originally Posted by Charlie

So while you are right they have no legal basis to tax you the laws in Kalifornia are so unrepresentative of reality they will attack you and let you try and figure out the law.

As a practicing CPA who's done a few returns around the country, including California, I can assure you this is correct. And I can also tell you one of your best defenses is to show them a "resident" return from another state. Of course if you are claiming Florida, Texas or some other state with no state income tax you out of luck.

[osirissail]

Trying to keep some small attachment to the OP and tax considerations as a cruiser, I stated in earlier posts that the whole idea is to be sure to consolidate ALL your visible links with various levels of government to ONE address in ONE State. The stated reason is to try to eliminate ambiguity with which any bureaucratic entity can make claims on your income and assets.
- - Although California is well known to be obnoxious in its desperate attempt to gather taxes, they did not originate the concept of "guilty until you prove yourself innocent" - That is the brainchild of our US Federal Taxation system. It has never been any different. It is the concept that rather than having the IRS go after you and tell you each year what your share is - you are responsible to determine your taxes set out under the laws, file and pay them. The idea being that the government tax collectors then only had to "go after" those perceived to be "evading" paying their lawful share. And it generally works. To preclude more drift, "lawful" is what the Congress and bureaucrats have declared is "lawful," not what we or any others might morally or otherwise define as "lawful."
- - To keep your cruising life centered around the "joys" of the cruising lifestyle, I certainly recommend setting up your financial's and other related legal paper trails to attempt to keep the bureaucrats from "noticing you" and thereby requiring your personal appearance in their offices at worst and reams of documents and "proof" of your situation at least. There is a "price" for this "peace" which normally means you cannot take "full advantage" of loopholes and other "tricks" to avoid paying a penny more than "necessary." Doing such will normally "flag" you for more bureaucratic attention and examination.
- - There are well-known parameters for things that will cause the IRS computer to spit your name out and staying underneath the "trigger" points is the best way to keep those unpleasant interviews and correspondence at a minimum.

[Charlie]

Originally Posted by UWOA

California Department of Revenue is the state taxing agency ... you said the IRS came after you ... and while it is true that they (California) may claim you owe taxes, 'coming after you' is the proof of the matter I was speaking of ... and as you inferred later on they did not meet that burden of proof.


And, while you may consider that in 'K'alifornia, you are guilty until proven innocent, American jurisprudence doesn't work that way, the feds, for one, wouldn't allow it to happen -- i.e. constitutonal protections, and secondly there are well founded legal concepts such as stare decisis that would invalidate such an approach ....

I made a mistake it is the Franchise Tax Board(FTB) not the IRS.

Kalifornia and the Infernal Revenue Service do not work on the innocent till proven guilty area of our constitution. The other part to that is that you need to be able to defend yourself. If you have enough money you can buy your innocence. But for the average working stiff it is more then one can afford. If we had had to pay to defend ourselves an attorney wanted a $5k retainer for $4k in taxes. That was for a clear cut case of being innocent.