Hi Tax Gurus,

I am a resident of CA (since 2007) and my wife was a resident of IL (since 2006). We got married in June 2010 and in Sept 2010 she moved to CA. I work in CA on H1, while she is on H4 after the move. My income is from CA and her income was from IL until the move and she has no income in CA.

My questions:
1. We believe married filing jointly is the best option. True?
2. For CA state return, what form to file and do we declare all worldwide income (including IL)?
3. For IL state return, what form to file and do we declare all worldwide income or only her income earned in IL?
4. Can I claim a credit in CA return for paying taxes to IL?

I read about CA being community property state - so half the income I earned from June to Dec 2010 belongs to my wife. Do we have to split it this way even if we are filing jointly? Do we have to declare this split allocation in IL or CA state returns even if we are filing jointly? Eg: in #3 above, for IL state return should we declare her IL income and half of my June-Dec earnings?


Thanks,
Sivaram

My questions:
1. We believe married filing jointly is the best option. True?

Generally yes, unless either of you have some extraordinary write-offs that might be limited by your joint income level (such as high medical expenses, or casualty losses). You can always run the numbers both ways and see. If you are using tax software like Turbotax it will determine which filing status is best automatically.


2. For CA state return, what form to file and do we declare all worldwide income (including IL)?


File the regular resident tax return. You complete this return AFTER you've filed the IL tax return. Yes, you report all worldwide income as a couple, including the IL income of your wife. But you take a credit for income taxes paid to other jurisdictions, so your CA tax bill is reduced by the amount she has to pay IL. The only 'gotcha' here is that since CA's tax rates are higher than IL's you will end up paying tax to CA on your wife's IL income due to the difference between the CA and IL tax rates.


3. For IL state return, what form to file and do we declare all worldwide income or only her income earned in IL?

Use the part-year resident return, which does require that you report all income for both of you, but on that form you allocate your income between IL-source and non IL-source. You get taxed only on the IL source (namely your wife's income). As noted above you then get a credit for this amount against your CA return. This is why you need to complete the IL return first.


4. Can I claim a credit in CA return for paying taxes to IL?
Yes - as described above.


I read about CA being community property state - so half the income I earned from June to Dec 2010 belongs to my wife. Do we have to split it this way even if we are filing jointly?

No need, since you are filing jointly and hence all your income as a couple is reported as one lump sum to CA.


Do we have to declare this split allocation in IL or CA state returns even if we are filing jointly? eg: in #3 above, for IL state return should we declare her IL income and half of my June-Dec earnings? No - for two reasons: (a) you weren't married at the time she earned this money, and (b) IL is not a community property state.

Thank you Ebaines for the fast answer. Just two clarifications
#2 For CA return, when you say "income as a couple": Since we got married only in June, does that mean I have to file CA taxes on "my full year CA income + her Jan-Sept IL income" OR "my full year CA income + her June-Sept IL income"?

The last point/line: we were married in June but she moved to CA only in Sept. So, I had CA income from June to Sept while she had IL income in the same period. But does the fact that IL is not a community property state override this fact?

I realise the mistake I did with TurboTax, I filled CA first and then started to fill IL. I guess I have to start a new return - because it doesn't show me how to reorder the state returns. Also, it filled CA NR and IL NR forms - could this be due to the my incorrect ordering of the state returns?

So, in summary I file in the following order:
1. FED taxes on all income
2. IL taxes on only IL income she earned using part-year resident forms.
3. CA taxes on all income with credit for IL taxes using regular resident forms.

I hope I understood this correctly.

Thanks,
Sivaram

Thank you Ebaines for the prompt answer. I have some follow-up questions. Do I post here or post in a follow-up answer. I'll do the latter.

Thank you Ebaines for the fast answer. Just two clarifications
#2 For CA return, when you say "income as a couple": Since we got married only in June, does that mean I have to file CA taxes on "my full year CA income + her Jan-Sept IL income" OR "my full year CA income + her June-Sept IL income"?

I meant the total of both your incomes for the full year. So your full income Jan - Dec + her full income Jan - Dec.


the last point/line: we were married in June but she moved to CA only in Sept. So, I had CA income from June to Sept while she had IL income in the same period. But does the fact that IL is not a community property state override this fact? Yes, no worries.


I realise the mistake I did with TurboTax, I filled CA first and then started to fill IL. I guess I have to start a new return - coz it doesnt show me how to reorder the state returns. Also, it filled CA NR and IL NR forms - could this be due to the my incorrect ordering of the state returns?

Sorry - I'm not sure how you get TurboTax to do it correctly. I would think if you answered the interview questions correctly it would do it right.


So, in summary I file in the following order:
1. FED taxes on all income
2. IL taxes on only IL income she earned using part-year resident forms.
3. CA taxes on all income with credit for IL taxes using regular resident forms.

I hope I understood this correctly.


Yes - that's right.

Thanks again ebaines. I tried again with a new turbotax return and this is what happened:

1. the order of states didn't matter - I still ended up with same tax.

2. since my spouse has different residency status and dates for 2010, turbotax picks CA NR/PY resident form automatically (only way to override was to say that both of us were full year resident of CA - but she moved to CA only on 9/1/2010)

3. CA gives other state credit only if the other state is "Arizona, Indiana, Oregon, Virginia, Guam". Maybe this is because of the NR or partyear status?

4. IL - turbotax makes both of us as part year resident of IL. I never lived in IL, I don't know how this is calculated. Can I can override these entires for myself and keep them for my wife.

5. IL offers other state credit for CA: but how does it work. Technically, IL hasn't taxed my CA income and CA hasn't taxed her IL income. When doing the Fed and CA income allocations, I remove any IL income for CA columns (and similarly for when filling IL income allocations I remove any CA income.

Please advise.

Thanks,
Sivaram

Thanks ebaines, I tried again and back to more issues. I've posted a follow-up answer

I am going through a divorce. My husband wants to file turbo tax jointly and direct deposit the sizable refund into his personal checking account. How do I sign the tax return? Is it assumed joint consent? How can the government hold me responsible if I never see the return or sign it.