Hi,
This question is troubling me for a while and I would appreciate if someone can explain how I should do my state tax returns.

Last year. I moved from IN to CA. My wife worked in IN the whole year and received income from only IN. All my income just came from CA. I am planning to file as married filing jointly for the federal return. I guess the correct status for both my state tax returns (IN and CA) would be part year resident (and married filing jointly), but I am not sure how to divide the income.

My main source of confusion if that CA is a community property state, which means half of my income is my wife's income (and vice versa). IN on the other hand is not a community property state. So, how should I split our joint income (and why)?

1) Report my income to CA and report my wife's income to IN. (as per IN law).
2) Report half of my income + half of my wife's income to CA; Similarly report half of my income + half of my wife's income to IN (as per CA community law).

I also have some interest/dividend income and capital gains/losses. All our bank + investing accounts are separate. Should I use option (1) or option (2) for this income?

It seems that I am missing some crucial point here. I would really appreciate any help.

Thanks,
Allwin

Allwin:

You report BOTH state incomes on BOTH state returns.

However, you only pay taxes on the income earned within the respective state, i.e. California taxes on the California income and Indiana taxes on the Indiana income.

The tax RATE will be driven by the combined income (that's why both incomes are reprted), but only the respective state income is taxed.

The community property status is irrelevant in this computation.