How to File - Married Couple living in different states

They will have to file 540NR for CA, same filing status as federal.

Because CA is a community property state and the wife is domiciled in CA, half of the wife's income is CA source income to your client. All of the CA income will be on the CA 540NR (half from wife, half from your client), but half of it will also be taxable to your client as a NJ resident (world-wide income). This will result in double-taxation and an "other state tax credit" for such income which is double-taxed.

Beyond that, I'll defer to Katie J. when she comes along to give the authoritative answer.

Professional help is recommended in this situation, since residency, domicile, community property, double-taxation, etc are all non-trivial issues.

-Mark Bole

40 years ago California required a married couple to use the same filing status for their state return that they used for their federal. I'll be surprised if that has changed.

Correct.

-Mark Bole

There are two exceptions to this rule in CA.

540 INSTRUCTIONS:

Exception: If you file a joint tax return for federal, you may file separately for California if either spouse was: ? An active member of the United States armed forces or any auxiliary military branch during 2009.

? A nonresident for the entire year and had no income from California sources during 2009.

Caution ? Community Property States: If the spouse earning the California source income is domiciled in a community property state, community income will be split equally between the spouses. Both spouses will have California source income and they will not qualify for the nonresident spouse exception.

If there is a pre-nup to specify that the income each earned is separate income, and the money are not co-mingled in a joint account, then community property laws on the earned income would not apply. Once again, this is complicated territory.

Clients are still married as of 12/31/09. Does any of the NY husband income (resident of NJ all year) need to get reported on CA? I sounds like they will file as MFJ non-resident in NY only showing NY husband income, MFJ resident in NJ showing all income and getting a partial credit from both CA & NY and MFJ in CA showing only 1/2 of wives income?? Is the CA return resident or non-resident? Any further help would be greatly appreciated!

And the more recent exception of course, if CA registered domestic partners or same-sex married couples, the federal and state filing status most likely will be different as well.

-Mark Bole

Yes, his half of the community CA source income from his wife.

I sounds

As I mentioned, unless both spouses are full-year CA residents, they will need CA Form 540NR. All of the wife's community income will be reported on the CA return (half from her, half from her husband).

-Mark Bole

NY & CA returns seem to have gone fine. I am having issues with the NJ return. Does any of the wife's CA income need to be reported on the NJ return. Is the NJ return with husband as a NJ Resident & wife as a non-resident require two returns?

Yes. Wife domiciled in comm. prop. state => half of her income belongs to husband, it is CA source income to him. Therefore, from his point of view, the same income (50% community income from wife) is taxable by CA (source) and NJ (worldwide income of a resident). Other state tax credit should apply.

This assumes the marital community has not ended because of a separation with no intention to reconcile. See IRS Pub 555.

Is the NJ return with husband as a NJ Resident & wife

Don't know that one...but it's probably in the instructions somewhere.

-Mark Bole

Luka,

For NJ purposes, you probably should be filing the resident spouse's return as MFS. Technically, as Mark Bole says, his income (calculated as if he had filed MFS for federal purposes) would include his community 1/2 of W's California earnings (assuming her domicile, as well as her residence, is in California). You would claim a credit on his NJ resident return for the tax paid to California on his 1/2 of her earnings (and any other community income).

Unless H is domiciled in California (or some other community property state), none of his earnings are attributable to W. It all goes on his MFS return. Unless W has other NJ source income (e.g., if the spouses jointly owned income-producing real or tangible personal property in NJ), she has no need to file a NJ tax return.

In NJ the spouses do have the option to file a joint return; however, if they do that, all of their income from all sources will be subject to NJ tax as if both were residents for the entire year. It may be worth your while to calculate the NJ tax that way just to see what the effect might be. If W's income is substantially lower than H's, a joint return might possibly result in a lower tax liability than H's MFS return.

Katie in San Diego

I should also point out, in case Mark and others haven't made it perfectly clear, that the California Schedule CA- 540NR Col. E should include all of W's income, from all sources, for the entire year, plus H's community 1/2 of her California earnings and his community 1/2 of any other community income (probably none in this instance). Col. D would include all income of both spouses, from all sources, for the entire year.

Katie in San Diego