`Source Taxes': You Can Run, But You Can't Hide

When he moved to Florida in 1989, retired salesman Don Fox thought he could escape the long arm of the California tax man. But that arm was longer than he imagined. It turns out California is one of about 12 states that tax the retirement income of former residents. So even though he now lives in a state with no income tax, Fox still has to pay his old state a "source tax" on pension money.

Such levies have long been on the books but have only recently been widely enforced. "States are hungry for tax money," says pension specialist Milton Pickman. "They're broke."

Each state has its own rules on what it taxes and how seriously it enforces the law. California, the most aggressive, hires collection agencies and imposes up to a 55% penalty and interest on delinquent seniors who have moved away. New Jersey, meanwhile, repealed its nonresident tax on pensions in 1989. If you want the lowdown on your state, a good resource is Retirees to Eliminate State Income Source Tax (resist) of America, in Carson City, Nev. (702 887-1296). Or call your state's department of taxation.

LOOK FIRST. While retirees gripe about the unfairness of taxation without representation, courts have so far upheld source taxes. Even so, there are some steps you can take to minimize payouts.

Before tapping money from pension plans, know the law of the state where you earned it. Paying attention to details may mean thousands of dollars in savings. New York, for one, would tax you on lump-sum withdrawals from an individual retirement account. But if you took the money as an annuity--collecting a set amount every year--the state would exempt the entire tax.

Pick your new state with care. Florida and Nevada, which don't impose state income taxes, can't protect retirees from taxes owed to other states. They do, however, bar other states from grabbing retirees' property to satisfy tax debts.

Also, keep meticulous records, "so you don't have to duplicate them later," says Anthony Curatola, accounting and taxation professor at Drexel University. This is important if you qualify for a credit in your home state for taxes paid in another.

Finally, you can lobby to change the law. resist and other groups have been urging Congress to bar the source tax--or at least to require that states give taxpayers advance notice. Hearings could take place next term. Michele Galen

'source taxes': you can run, but you can't hide.

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