TaxProTalk.com

Hello everyone,

We have a couple of married filing jointly taxpayers. Wife is US citizen and husband is green card holder, Husband stays in the CA for 50 days or less each year. Wife has CA W-2 income and has a primary home in CA; husband has foreign earned income and capital gain from foreign stock transactions, maintains a regular home in foreign country. For CA filing, can they file 540NR and exclude husband foreign earned income?

What's your opinion?

Thank you,

Where is the husband claiming residency? Does the foreign country have community property marriage laws? You may need to report half of husbands income.

Not only can they file Form 540NR, they must file it unless both spouses were full year residents. The state return starts with federal AGI, adjusts for CA law (such as adding back the excluded foreign income), and then, only in the last column of Schedule CA(540NR), do you begin to adjust for CA source income.

The community property income splitting only matters if they are filing MFS.

Disagree with makbo on only applying to MFS. Cant find the relevant court case as I'm out of the office but here's something that may be on point.

https://www.robertschriebman.net/Articl ... OSES.shtml

"Marital property interests in personal property, including earned income, are determined under the laws of the acquiring spouse’s domicile. See Schecter v. Superior Court (1957) 49 Cal.2d 3, 10. If one spouse is a resident of California and the other spouse is domiciled in a community property state outside of California, the California spouse is liable for California income tax on his or her one half community property interest in the out-of-state spouse’s earnings."

CreditMyDebit wrote:Disagree with makbo on only applying to MFS.

Yes, but since it's all reported on a single return when filing MFJ, it's not "split". Income splitting in this context usually refers to splitting income across two different returns.

If wife is full year CA resident, and husband is full-year domiciliary resident of a foreign country which has community property law (which we don't know from the OP), then half of her income is CA source income to him (but it doesn't get split, it's already included in the MFJ return). And half of his foreign-source income belongs to her, which as a CA resident, she will be taxed on (worldwide income). But again, since all of his income is already recorded on the MFJ return, it's not really "split", but I can see calling it that. It's not until the last column of Schedule CA(540NR) that a determination is made whether or not the income is taxable to CA. Any income that belongs to her will be taxed (worldwide income is taxable for CA resident), but only his portion of CA source income will be taxed. The foreign jurisdiction might also want to tax her on her foreign-source share of his income, and CA has no foreign tax credit, so tough luck there unless the foreign jurisdiction has a tax credit for tax paid to CA.

CreditMyDebit wrote:Where is the husband claiming residency? Does the foreign country have community property marriage laws? You may need to report half of husbands income.

No, you must report all the husband's income, but only half of it (if he is domiciled in a comm. prop. jurisdiction) or none of it (otherwise) is taxable to CA.

Agree with that. In post 2 I probably should have said report half of husbands income as taxable to CA. I was not referring to splitting but post 3 made it seem like you potentially disagreed with picking up half of the foreign income as taxable to CA using the term income splitting.

Thank you everyone! It is a community property foreign country.