CA state tax - Q on community income

Did she establish a new domicile, in other words did she abandon her CA domicile and establish stronger ties to her new location than the one she left? It's uncommon for spouses to have different domiciles, but not unheard of.

Unless both spouses were full-year CA residents, you must use Form 540-NR.

They tax all her income for the part of the year she was a resident, and only CA source income for the part of the year she was a non-resident.

For the part of the year you were both CA residents, no adjustments needed. For the part of the year she was not a CA resident, it is more complicated. You are taxed on world-wide income (all your income plus your 50% share of her income). She is taxed on CA source income (her

Fortunately WA has no state income tax or you would be facing similar complications there.

See a professional.

-Mark Bole

This is not making sense to me. Are you saying that CA would tax half of her WA income?

If the wife is domiciled in a community property state, 50% of her earnings (in this case, WA source income) belongs to her husband. As a resident, the husband is taxed by CA on world-wide income, including this WA-source community income from his wife. Likewise, 50% of his CA source earnings belongs to her (since he too is domiciled in a community property state), but WA has no state tax, so they won't tax her on it (but California will tax it all, since it is CA source income regardless of which spouse owns it).

-Mark Bole

So it seems to work like this. CA will tax half of the wife's WA income, and WA will tax half of the husband's CA income, then CA will give a tax credit for taxes paid to WA, and WA will give a credit for taxes paid to CA. Now WA has no income tax. So this seems to be a subtle form of marriage penalty.

"Communistic property states", as Harlan likes to call them, are the culprit here, I think.

Is it a coincidence that Nevada, Washington, and Texas are states with both community property and no state income tax, and are all adjacent to one or more other community property states that do have state taxes?

-Mark Bole

Does a prenup that specifies that their W2 income is separate income override the default treatment of W2 income (as belonging 1/2 to each spouse)? And if they had separate bank accounts, even their 1099-INT,

Conspiracy theories...

One can keep separate *property* owned before marriage (or inherited, gifted) out of the community, and keep the income produced by that property separate as well, no pre-nup required, just good records to show the property was not mingled.

I'm not sure about employee compensation, or earnings from a trade or business, I suspect a pre-nup does not affect their tax treatment during the marriage, only perhaps how the spoils are divided upon divorce.

-Mark Bole

A pre-nup is insufficient. There must be continued separation (i.e. no comingling of funds); NO JOINT bank accounts or joint ownership of anything. Only then do they have a chance to avoid CP laws.

Number of states with CP: 15 (30%). Number of states with IT: 45 (90%) (+/- 1)

Only 2 states have no neighbors (Alaska and Hawaii). All other states have at least 2 neighbors.

The actual computation is left as an exercise for the reader. Don't forget your aluminum hat.

Where did you get a count of 15 for states with community property? It's AZ, CA, ID, LA, NM, NV, TX, WA, WI, total of nine, see the front cover of IRS Pub 555. (Alaska's notion of community property is not addressed by the IRS in this pub, so I'm not addressing it either).

Let's either leave Alaska out for now, or treat it as "adjacent" to Washington, which it is closest to out of the lower 48 states (doing so only strengthens the statements below).

Only one "no tax" state, Florida, is *not* adjacent to or one of the community property states.

Only one community property state, Wisconsin, is *not* adjacent to or one of the no-tax states (and Wisconsin's notion of community property is not really the same as all the others, from what I've been told).

-Mark Bole

My error. I swapped two numbers when I was thinking about this. I think 15 is the count of common-law marriage states. That can be just as bad!

Then what should Hawaii be adjacent to? Also, I forgot that Maine doesn't touch Massachusetts; New Hampshire has about 25 miles of coastline that intercedes.

Obviously Hawaii is adjacent to California, we call it "Outer California" ;-)

But it is neither no-tax nor community-property.

-Mark Bole

Hawaii has Interstate Highways.