Cross three states, married couple living in different state, one nonresident spouse, each state tax filing

JL_2021 · ‎April 1, 2022

Note: I have posted the same post in get your taxes done yesterday, however, I think it would be better to post here to be specific to state tax filing. Please let me know if I have to delete the original post to avoid duplication.

My wife and I married in Jan 2021. I am on an F1 visa, and I live in Illinois as a Ph.D. student. I am still a nonresident alien since I am not in the US for more than five years. My wife lived in Maryland (MD) from Jan to Mar 2021. Since then, she moved to California (CA) for a new job on Apr 1st and living there. My wife is on H1B, and she is a resident alien. For the year 2021, we want to file jointly (MFJ) for the federal tax return by treating me, the nonresident spouse, as a resident for tax purposes (see IRS Nonresident Spouse), which is also our first year to make this choice.

Now we are wondering about the state tax return for CA, MD, and IL:

1. My wife does not have income from IL. She only has income from MD and CA when she lives there. She is a nonresident of IL.

2. I do not have income from MD and CA. I only have income from IL and I am a resident of IL. I have a visit and vacation in CA and then return back to IL, and I do not have any income from CA during my visit and vacation.

After reading the CA FTB website, we noticed that CA is a community property state. It seems we can only choose to file jointly for the CA state tax return since my wife has CA source income when she lives in CA, thus we are not qualified for the nonresident spouse exception, which is based on the CA 540NR instruction (see the Exception in Filing Status about the caution of Community Property States).

The IL allows filing the IL state tax return separately if one spouse is a resident of IL while the other is a nonresident of IL (see definition and filing status from IL Revenue) even if we file a joint federal return. And for MD, it also allows filing the MD state tax return separately if we file a joint federal return but were domiciled in different states on the last day of the tax year (see married persons in Determine Your Filing Status from MD Revenue).

Now we are wondering whether we can do the following to prepare each state's tax return with the TurboTax software:

1. For CA, create a married filing jointly (MFJ) return for federal tax and then generate the joint CA state tax. File the joint federal return and joint CA state return.

2. For MD state tax, create a Mock Married Filing Separately (MFS) federal return by only inserting all my wife's income, and use this MFS federal return to generate the MFS MD state return. File this separate MD state return for my wife.

3. For IL state tax, create a Mock MFS federal return by only inserting my income and use this MFS federal return to generate the MFS IL state return. File this separate IL state return for me since only me has IL income.

The questions are:

(Q1) Is it correct to file each state's return: MFJ CA return, MFS MD return, MFS IL return, as stated above?

(Q2) Is there anything that we need to be aware of when preparing each state tax? For example, the CA is a community property state, while the MD and IL are non-community property states.

I see a similar discussion here, but my case may be different, and I hope the tax experts could help me confirm my thinking. Thank you so much!

If my proposal is correct, then there is one more question about the filing of CA state tax:
I received the Ph.D. student Fellowship in Illinois. The fellowship is received without the need to perform services such as teaching or research. Based on the US-China tax treaty, the fellowship is exempted from federal tax even if I am a nonresident alien electing to file a joint return, because I am still qualified for the exception stated in the tax treaty's saving clause (see IRS Pub 519 Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens). My university has reported my fellowship (with income code 16 and exemption code 04 for box 3a) and other $5000 (with income code 20 and exemption code 04 for box 3a) in two separate Form 1042-S to indicate that they are exempted from federal and IL state tax based on the tax treaty. For our joint federal tax return, we want to report the income from my 1042-S in the Other Income by using this method, and attach two Form 8833 to explain them. By using this method, line 11 in federal Form 1040 will not include them.

However, we notice that the CA does not exempt the CA source income from the tax treaty (see CA FTB Publication 1031 Section K Residents of or Individuals in Foreign Countries). So the question is:

(Q3) Do I need to add the income amount (in my two Form 1042-S) back to the AGI in our joint CA state return, although those incomes in Form 1042-S are not CA source incomes? If I need to add them back, how should I correctly report them in CA Form 540NR and Schedule?