How do new California residents get taxed? Is there tax owed when cashing out a life insurance policy?

This week, those questions get answered by sacbee.com's two tax experts: state Franchise Tax Board spokesman Daniel Tahara and IRS expert Jesse Weller.

To see more of their advice or to ask your own "Ask the Experts" questions, go to: www.sacbee.com/ask. That's where you'll also find free advice from local experts on personal finances, investing and wills/trusts.

We recently moved from Texas to California and purchased a home on Dec. 13, 2011. I understand that makes us residents of California. Do we pay state taxes for 2011? If so, are they pro-rated?

Welcome to California and congratulations on the purchase of your new home.

For tax year 2011, you would need to file California Form 540 NR (Nonresident or Part-Year Resident).

Generally, you only pay taxes on income received while you were a resident of California. However, the taxes are not prorated. For example, if you received a lump sum from the sale of intangible property or a bonus on Dec. 14, 2011, you would pay California tax on the entire amount, not 18/365th of it.

Also, if you were living in California before the purchase of your home, you may have become a resident prior to the sale closing.

For more information on determining residency status and on taxation of part-year residents, please see FTB Publication 1031, "Guidelines for Determining Resident Status."

You can obtain Form 540 NR and Publication 1031 on our website, www.ftb.ca.gov.

I have a whole life insurance policy that has been building up a cash value based on the premiums paid. I no longer need the policy. If I cancel the policy and take out the cash value, is that money subject to income taxes, both state and federal? Or is it my money, since I've already paid taxes on the income used to pay the monthly premium?

Life insurance proceeds paid to a taxpayer because of the death of the insured person are usually not taxable.

However, when a policyholder surrenders a life insurance policy for cash, the taxpayer must report and pay tax on any proceeds that are more than the cost of the life insurance policy.

Generally, a taxpayer's cost (also called "investment in the contract") is the total of premiums paid for the life insurance policy, less any refunded premiums, rebates, dividends or unrepaid loans.

Taxpayers should receive from their insurance company a Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.), showing the total surrender proceeds and the taxable portion. It usually arrives in January following the year of surrender.

More information is available in IRS Publication 525 (Taxable and Nontaxable Income). You can view it online at www.irs.gov or receive a mailed paper copy by calling (800) TAX-FORM (829-3676).

– Compiled by Claudia Buck

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