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JessJake · Nov 3, 2010, 08:08 AM

Hello,
Thanks so much for any help you can provide.
My husband and I are married (7 years) and live in SC. I was just offered a huge promotion within my company - and I will be moving to California and working there. It will be considered a permanent relocation. My company is providing me with a furnished condo (of which the costs will be added to my W-2 and taxed) - and relocation expenses. My husband is not moving. He will remain in SC and continue to work there. How will this work? We have a home in SC, and a vacation home in SC, and now I will have a home in California. We are not selling our SC homes. My husband will still be living and working there. What is the best method in which to file our tax returns in the future? Married, filing separately; or Married filing jointly (as we've done up until now). What are the tax implications that I need to be aware of while negotiating this new promotion? We want to be sure that we are not taxed by California on any of our SC assets or on my husband's salary. Thanks for any help you can provide.

ebaines · Nov 3, 2010, 08:55 AM

You still want to file as Married Filing Jointly for your federal taxes. For the two sate returns it's usually required that you use the same filing status as on your federal return, which has the unfortunate effect of causing your husband's income to be taxed at CA rates. But there is an exception to this rule - you can each file as Married Filing Separately, but only if (a) you claim CA as your residence and SC was not your residence at any time during the year, (b) your spouse claims SC as his residence and he did not reside in CA at any time during the year, and (c) neither of you has any income from the other state. In other words, you can have no joint accounts and you would have to change all your bank accounts, investment accounts etc to your new CA address. Then you can each file separately,and so your husband's income is not subject to CA tax rates.

For the first year you would file a part-year resident return for CA, and a joint return for SC, taking a credit on your SC return for taxes you had to pay to CA.

JessJake · Nov 3, 2010, 09:52 AM

Thanks so much for your help. Is there anything I can do to negotiate my package so we don't have to separate everything? Why would my husband's wages be taxed at CA rates when he's working in SC? Why aren't mine taxed at SC rates, then?

ebaines · Nov 3, 2010, 10:38 AM

Your tax rate is dependent on where you work and where you live. So you're goingto pay CA at CA's rates no matter what, since you work there. The trick is how to get your husband's wages to be taxed at SC's rate and not report it at all to CA. Unfortunately if you file jointly in CA you MUST report your husband's income to CA. When you report income to two different states the way it works is this: the first tax return you file apples that state's tax rates to your income, and then the second state applies taxes at its rates to your income, but gives a credit back for the income that was already taxed by the first state. The problem is that the amount of the credit is limited to the second state's tax rate. This is to avoid having the tax payers of the low tax state having to subsidze the other state.

Here's an example to illustrate. Suppose CA's tax rate is 10% and SC's is 5%, and suppose both you and your husband each make $100K (this makes the math easy). Case 1: suppose you file separately in both states: then your CA tax bill is $10K and his SC tax bill is $5K, for a total of $15K. Case 2: Now suppose you file MFJ in both states. If you complete the CA return first you'd report $200K in income, which generates $20K in taxes. Then you file your SC return and report $200K in income for a bill of $10K, minus a credit of $10K for income reported to a different state for a net bill of $0. Bottom line is you paid $20K in income tax. Case 3: file in SC first, followed by CA: your SC bill is 5% of $200K = $10K. Your CA bill is 10% of $200K = $20K, less a credit for your SC taxes of $10K, for a net tax bill of $10K. Bottom line - you pay $20K between the two states.

As you can see if you file MFJ in both states the net bill is bigger than if you file separately. Now, if you can't file separately for the two states because you filed jointly on your federal return, you may be better off filing separately on your federal return as well - you'll have to run the actual numbers to see which works out best for you.