Community Property: Discrepancy between federal and CA rules


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Hi,

I am a California resident and my wife is non-resident alien domiciled in Canada. Our federal filing status is MFS since we do not elect her to be treated as non-resident. Fed publication says that if one spouse is nonresident alien and we are not taking the election for resident treatment and filing separately, we must disregard the community property rules. Then she doesn't even have to file a federal return because she's domiciled in Canada and does not have any US-sourced or effectively connected income, nor any income sourced in California due to community property rules for California being disregarded.

The question is what do we do with California? We must file separate returns (MFS) for sure since we can't use a different filing status.

A) Do we split my income between us and file a 550NR (non-resident) return for her? This would require me to use a different amount for gross income than was used in my 1040. Tax software doesn't allow you to override this. And it's not clear, if you can't override it, where else adjustments for community property treatment differences from federal return could be done?

Or

B) Do we disregard community property rules because we had to disregard them in the federal return, in which case she wouldn't have to file a return in California either.

Tax obligations for A and B are appear similar, just a small advantage for total obligation for A. It's mainly a matter of who pays the taxes for half of my income.

If you have dealt with this, I'd appreciate some advice.

And yes, I am looking for a tax pro for advice, but I haven't been able to find one yet (either they are too busy now or they admit they are not knowledgable about this particular issue).

Thanks in advance.
 
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