I haven't looked at TurboTax itself to see how to enter the information, indeed I always do my taxes on paper and just use TT to double check my numbers, but the bottom line is that both IN and CA use a "unitary taxation" method in which a tax is first calculated on the total income, irrespective of residency and the prorated according to the amount actually earned in the state. IN does exclude the China tax treaty income from state taxation, CA does not. Your total income according to IN does not include the $10K, but does include it for CA's notion of total income. Your state income according to IN also does not include the $10K, but $5K of it is included in CA's state income.
