CA and TX taxes

For 2010, she will be a part-year CA/TX resident, you will be full-year CA resident. All earnings by either one of you from work performed in CA during the year are taxable by CA.

Yes, sounds right to me.

While had we stayed

Marriage "penalty" is a moving target; there may well be other tax benefits, federal or state, from being married that you don't want to lose. As with investing, tax considerations should probably not be the deciding factor as to your decision to get married or not.

If you both still lived in CA, you'd be paying state tax on the total combined income. So you are still getting half of her income free of state tax, just not all of it.

I don't have statistics, but I suspect your scenario is fairly uncommon, so that issues of "fairness" in your case gather little attention.

No, because you still have to allocate community income and deductions, and she would still have to file a CA non-resident return.

If audited, I think CA would claim you are still a resident. Even if not, the source income from CA (your job) is still going to be taxed by CA no matter where in the world you (or she) actually reside.

-Mark Bole

What you're missing is the state income tax "other state tax credit." You get a credit on your California taxes for any amounts subjected to TX income tax, and she gets a credit on her Texas taxes for amounts subjected to CA income tax.

(If either of you were in Arizona or Virginia, the other state tax credit flows in the opposite direction.)

========================================= MODERATOR'S COMMENT: Since when did Texas decide to have an income tax?

The credit is for *state income tax paid* on the amount on income, which, for TX, is $0.

The credit is limited to the amount of TX state income tax on that amount of income, also $0.

Seth

If you spent 183 days (in whole or in part) in CA, then CA isn't going to consider you a non-resident. In any case, your CA-sourced earnings are subject to CA's income tax.

Seth

The benefits of marriage typically include health insurance coverage for your spouse (but they both have good jobs and can probably get their own health insurance from the company they work for), social security survivorship benefits (although with both spouses working this may not be an issue).

The additional CA tax on 40k certainly looks like a marriage penalty to me. This is because it's an artifact of the community property rules. If the states were Michigan and Minnesota, there would be no additional on the 40k because they don't have the community income concept.

As for your last line, not sure I agree either. Your decision to stay together should not be based on tax issues. Some states will consider you to be married if you stay together. But your decision of whether to get that marriage certificate document should factor the tax considerations.

This is like saying I'm gonna hit you with unnecessary fees, but because I'm a nice guy I'll give it to you for half price.

Where is this 183 day rule? I think AZ has it, but not sure if CA does.

To be clear, the income from the CA company is CA source not because it's a CA company, but rather because you were present in CA when you earned that income. If you move to TX and telecommute, your income is not CA source income.

Not possible. However, if you have a prenup that specifies that each of your income is separate income, and your separate income is not commingled in a joint checking account, then I think the split of community income does not apply. I heard about this idea before, but not sure if anybody actually does this.

Making friends in TX definitely does not count!

If you drive in CA, then you have to register your car in CA, according to the CA DMV. So your car has to be registered in CA. Other factors are where your kids go to school, etc. The first part of your post said "and I have no current plans of moving to TX", so your intent is to be a CA resident. That settles it.

There is no 183 day rule in CA or AZ. AZ and CA law is quite similar. If domiciled in the state, you are a resident. (See below for an exception in CA.) If not domiciled but present for other than a temporary or transitory purpose you are a resident. Both states have a presumption rule. If you are present for more than 9 months, you are presumed to be a resident unless you can show satisfactory evidence that your stay was for a temporary or transitory purpose.

If domiciled in CA but absent from the state for a purpose that is not temporary or transitory, CA treats you as a nonresident for tax purposes. I don't know if AZ has this rule.

Whether you are in the state or out of the state for a "temporary or transitory purpose" depends upon all the facts and circumstances. There are a variety of decisions by the CA Board of Equalization on this issue.

There is also a "Six-month Presumption of Nonresidence Rule" that applies to seasonal visitors or tourists: if domiciled elsewhere, and not in the CA for more than a total of six months, the time spent in CA will be considered to be for a temporary or transitory purpose.

It would not apply to the OP.

-Mark Bole

We don't have a prenup. We could do a postnup, but I suppose those won't count? Our accounts have not been commingled in the last month we've been together. We have separate bank accounts, and she hasn't started her job yet.

Hehehe... I meant that in a jocular way. :) I understand that other non-community property states wouldn't have as big a penalty. This, to me, doesn't seem like a federal marriage "penalty," but a CA penalty that we are being hit with. Like you said, just because CA is offering to hit me with half the fees doesn't make it seem okay.

Also, as mentioned earlier, our decision to be together is never going to be influenced by taxes. But being together doesn't have to mean we have to allow ourselves to be gouged several thousand by CA since to us, marriage is just a legal piece of paper that we don't particularly care for. Getting a divorce could help if we save several thousand a year. However, maybe I'm wrong on this and it will come back and haunt me.

Currently, I'm thinking I may have to just suck it up and pay the CA tax for a few years and decide then. I have no idea what the proceedings for divorce and fees are like, and whether there are other implications that I'm neglecting, and whether I'm just being petty about these thousands.

All of your help has been very much appreciated.

Yeah. I said I didn't have any intent. Maybe in the future. Maybe I'll end up switching jobs.

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If you are in California, you can enter into a postnup that will be effective. It may not affect the rights of creditors that arise before the date of the agreement, however.

Just don't have the McCourt's lawyer draft it. =:-o

Actually, the extra tax you call a "penalty" is not due to California at all, it is due to Texas community property laws. If you lived in any other state with an income tax, nothing would change (bottom line) about your situation, you would still have one-half of your wife's earnings to report to your state of residency (and all of your earnings would be taxable to the state where you earned them).

However, if your wife had changed her domicile to a no-tax, separate-property state, you would not have the "penalty". So blame Texas, not California.

-Mark Bole