CA Resident with non-resident spouse


S

sfmead78

Hello,

I'm a California resident for tax purposes, and have California income
to report. I got married in 2007 to a Washington, DC resident who had
only DC income and no California income. She was physically in
California for about 3 months at the end of last year. We are filing
our federal taxes as "Married filing jointly."

My questions are:

1. For my California state taxes, should I file as "Married filing
jointly" and just report my own income (since my wife had no
California income)?

2. Do I use the resident or non-resident state form? I would imagine
resident, since all the income was earned by myself and not my spouse.

3. Same as 1 and 2, except regarding my wife's filing for DC.

If you can answer any of the questions above please let me know.
Thanks!
 
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K

Katie

Hello,

I'm a California resident for tax purposes, and have California income
to report. I got married in 2007 to a Washington, DC resident who had
only DC income and no California income. She was physically in
California for about 3 months at the end of last year. We are filing
our federal taxes as "Married filing jointly."

My questions are:

1. For my California state taxes, should I file as "Married filing
jointly" and just report my own income (since my wife had no
California income)?

2. Do I use the resident or non-resident state form? I would imagine
resident, since all the income was earned by myself and not my spouse.

3. Same as 1 and 2, except regarding my wife's filing for DC.

If you can answer any of the questions above please let me know.
Thanks!


The answers to your questions depend on some facts you have not
supplied.

Did your wife move to California to live with you before the end of
2007, or was she just visiting here? Is she still in California? Is
she still employed in DC? It makes a difference. If she has given up
her DC job and living quarters and has moved in with you in
California, and did so in 2007, then she was a part-year CA resident
in 2007. If she was just visiting and has returned to DC to continue
her employment there, then she was a nonresident of CA for the entire
year.

I'm assuming your domicile in CA and that hers is (or was) DC or some
other separate property jurisdiction. As you may know, California is
a community property state. The division of income between spouses
for tax purposes is governed by the laws of their state of domicile.
While spouses who live together generally have the same domicile, it
is entirely possible for spouses to have different domiciles.
Assuming you are domiciled in California, your earnings are community
income (in the absence of a written agreement between you and your
wife to the contrary), which means half of your earnings belong to
her. If that is the case, then if you file MFJ for federal purposes,
you must also file MFJ for California. The only exceptions to the
rule that filing status must be the same as federal are if one or both
spouses are active duty military, or if one spouse is a full year
nonresident and has no California source income. Since your
California earnings belong 50% to your wife from the date of your
marriage onward, you wife DOES have California source income and you
must file MFJ in California.

The joint return will be filed on Form 540NR, which is the form
provided for nonresidents and part-year residents. On Schedule
CA-540NR you will see 5 columns: federal, CA additions, CA
subtractions, California amounts (as if both spouses were full-year CA
residents), and Col. E, which is California taxable amounts. Col. E
will include 100% of your income for the entire year (including your
community 1/2 of your earnings after the date of marriage), plus your
wife's CA source income for the part of the year when she was a
nonresident (including her community 1/2 of your earnings after
marriage). It will also include 100% of her income for any part of
the year when she was a CA resident. You calculate the average tax
rate that would have applied if both of you had been CA residents for
the entire year, and prorate that rate by the ratio of California
(Col.E) to total (Col. D) taxable income. That is the rate that
applies to the Col. E income.

Look at the DC form instructions to determine how to file your wife's
DC return. I don't have time to look at it now but I'll try to get
back to this later to answer any questions you have about DC.

Katie in San Diego
 
R

removeps-groups

Col. E
will include 100% of your income for the entire year (including your
community 1/2 of your earnings after the date of marriage), plus your
wife's CA source income for the part of the year when she was a
nonresident (including her community 1/2 of your earnings after
marriage). It will also include 100% of her income for any part of
the year when she was a CA resident.
But the above formula can result on people taxed on more than what
they make. Consider an example:

- CA person makes 100k for all of year
- they get married in March/1
- DC person makes 20k for Jan and Feb
- DC person makes 130k for Mar to Sep
- DC person moves to CA on October/1
- DC person makes 0k in CA

So on 540NR for line 7 (Wages) and line 22 (Total Income) and line 37
(AGI):
(A) Federal AGI is 250k.
(B) 0 in my example
(C) 0 in my example
(D) same as (A)
(E) 100+130/2 = 165k.

So CA will tax tax 165k. They actually tax the full 250k then
multiply 165k by the ratio of the full CA tax to 250k. The effect of
this is to tax the 165k at a higher rate, which seems unfair as CA
seems to be piggy-backing on money earned in other states.

Now DC will probably tax the entire 150k that the spouse made in DC.
The net result is that 165+150=315k of income is taxed at the various
state levels.
 
K

Katie

But the above formula can result on people taxed on more than what
they make.  Consider an example:

- CA person makes 100k for all of year
- they get married in March/1
- DC person makes 20k for Jan and Feb
- DC person makes 130k for Mar to Sep
- DC person moves to CA on October/1
- DC person makes 0k in CA

So on 540NR for line 7 (Wages) and line 22 (Total Income) and line 37
(AGI):
(A) Federal AGI is 250k.
(B) 0 in my example
(C) 0 in my example
(D) same as (A)
(E) 100+130/2 = 165k.

So CA will tax tax 165k.  They actually tax the full 250k then
multiply 165k by the ratio of the full CA tax to 250k.  The effect of
this is to tax the 165k at a higher rate, which seems unfair as CA
seems to be piggy-backing on money earned in other states.

Now DC will probably tax the entire 150k that the spouse made in DC.
The net result is that 165+150=315k of income is taxed at the various
state levels.
Actually, your example is wrong. California will not tax ANY of the
nonresident spouse's income earned before she became a resident. In
your example, Col. E would consist of 100% of H's salary for the
entire year, or $100K. Period. This is based on the assumption that
W, before moving to California, was domiciled in DC or another
separate property jurisdiction. She would not acquire a CA domicile
until she moved to CA with the intention of remaining permanently or
indefinitely -- i.e., not until, in your example, October 1. So none
of her income is community income, and none of it is attributable to
H.

If W had been domiciled in a community property jurisdiction, H's
community 1/2 of her earnings would have been included in Col. E, but
not her 1/2. They would have received credit on the California return
for the tax they paid to the state of her residence on his community
1/2 of her earnings there, thus mitigating the double taxation of that
income.

It is true that H's $100K of income is taxed at a higher rate than it
would have been if W's income were not also included in computing the
rate. The rate is calculated as if a nonresident or part-year
resident had been a resident for the entire year. Many states that
have graduated rate structures use this method. It was approved by
the Vermont Supreme Court in the 1960s, IIRC, and has been approved by
the high courts in several other states since then. The U.S. Supreme
Court has never granted certiorari in such a case. Although it is
often referred to nowadays as the "California method," in fact
California adopted this method fairly late -- not until 1982.

Katie in San Diego
 
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D

D. Stussy

Katie said:
The answers to your questions depend on some facts you have not
supplied.

Did your wife move to California to live with you before the end of
2007, or was she just visiting here? Is she still in California? Is
she still employed in DC? It makes a difference. If she has given up
her DC job and living quarters and has moved in with you in
California, and did so in 2007, then she was a part-year CA resident
in 2007. If she was just visiting and has returned to DC to continue
her employment there, then she was a nonresident of CA for the entire
year.

I'm assuming your domicile in CA and that hers is (or was) DC or some
other separate property jurisdiction. As you may know, California is
a community property state. The division of income between spouses
for tax purposes is governed by the laws of their state of domicile.
While spouses who live together generally have the same domicile, it
is entirely possible for spouses to have different domiciles.
Assuming you are domiciled in California, your earnings are community
income (in the absence of a written agreement between you and your
wife to the contrary), which means half of your earnings belong to
her. If that is the case, then if you file MFJ for federal purposes,
you must also file MFJ for California. The only exceptions to the
rule that filing status must be the same as federal are if one or both
spouses are active duty military, or if one spouse is a full year
nonresident and has no California source income. Since your
California earnings belong 50% to your wife from the date of your
marriage onward, you wife DOES have California source income and you
must file MFJ in California.

The joint return will be filed on Form 540NR, which is the form
provided for nonresidents and part-year residents. On Schedule
CA-540NR you will see 5 columns: federal, CA additions, CA
subtractions, California amounts (as if both spouses were full-year CA
residents), and Col. E, which is California taxable amounts. Col. E
will include 100% of your income for the entire year (including your
community 1/2 of your earnings after the date of marriage), plus your
wife's CA source income for the part of the year when she was a
nonresident (including her community 1/2 of your earnings after
marriage). It will also include 100% of her income for any part of
the year when she was a CA resident. You calculate the average tax
rate that would have applied if both of you had been CA residents for
the entire year, and prorate that rate by the ratio of California
(Col.E) to total (Col. D) taxable income. That is the rate that
applies to the Col. E income.

Look at the DC form instructions to determine how to file your wife's
DC return. I don't have time to look at it now but I'll try to get
back to this later to answer any questions you have about DC.
I would generally agree with this, but there is one other issue: As you got
married DURING 2007, have you sufficiently co-mingled your income and assets
so as to invoke the community property rules? Although it is generally
automatic (by default) due to the way most married couples operate, if you
haven't co-mingled any of your assets yet, I'm not certain that "the
community" has been formed. (This addresses the non-resident with
no-community-income exception mentioned above). If your wife has spent even
as much as $1 of money from you or your income, you have co-mingled, and
therefore community property rules apply.
 

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