I have a home in IL and received income from there until August (8 months income earned while in IL). I took a new position that bases me in Arizona and have secured a second residence there (4 months income earned while in AZ). My wife and children are staying in the IL home until they finish the school year - in June 2021. Part of my time in my AZ job puts me at a facility in CA (let's say 1 month of my 4 months in AZ is actually 'earned' in CA). My question is regarding multiple state taxes -- how to file and how to divvy up the income -- when I earn the income from different states, but technically have 'residence' in two states until my family can move to Arizona mid 2021. I assume I have to file in sequence, possibly IL first as that state was where I lived and had the most income. Then, file as a 'part-time resident' of AZ. Then as a 'non-resident earner' of CA. Is that right? Seems everyone wants a piece of me! I just want to make sure I do it correctly. Also, my wife has income as well that is earned fully in IL. We file 'married, jointly'. Would her income need to be handled separately somehow? She has 100% IL income so any percentages applied to my income within the 3 states should not apply to her income, I wouldn't think. Our situation is confusing. I'd appreciate any assistance in thinking through this.
The first key is to determine what are the filing-status and residency laws for each state. In this case both Arizona and Illinois follow similar treatments (which will make your situation much easier, as you will see).
Since you yourself are a part-year resident of Illinois and a part-year resident of Arizona, while your wife is a full-year resident of Illinois only, Illinois allows you to file as married filing separately in your situation, and Arizona allows the same treatment. (Please note that Arizona is a community-property state. However, because Illinois is not a community property state, you will not have to deal with community-property rules until she joins you in Arizona).
Because of this, your wife will file an Illinois full-year resident return, using the status of Married Filing Separately. You will file an Illinois Part-Year Resident return using the status of Married Filing Separate, and then an Arizona Part-Year Resident Return, also using the status of Married Filing Separately. Although this sounds complex, it is actually easier than trying to file joint returns, particularly for Illinois, which you can choose to do. But in this case, Illinois will consider you to be a full-year resident, meaning your Arizona income is also taxable in Illinois, and then you are claiming tax credits on the return from both Arizona and California. That treatment would probably result in more tax in your case, and will not be less tax.
What about California? California and Arizona have a reverse credit agreement. It's sort of a reciprocal arrangement. In this arrangement, an Arizona resident who works in California is responsible for tax in both states. In a standard two-state arrangement (like what exists between Illinois and Indiana, for example), the nonresident state taxes all income worked in that state, and the resident state does as well. However, the resident state gives a credit for tax paid to the nonresident state. The reverse credit arrangement works in reverse. The resident state taxes first, and then the nonresident state will give a credit for the taxes you pay to the resident state.
So you will want to prepare your returns in this order:
- Illinois part-year resident return
- Arizona part-year resident return
- California nonresident return.
Usually the nonresident return is completed first. But because of the reverse credit, this year the resident returns should be completed first.
To prepare the separate spousal state returns, even if you are filing a joint federal return, desktop software is better. Here is a Help article that can provide you with additional instructions: How do I prepare a joint federal return and separate state returns?
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That's terrific information, thank you.
One other piece of the puzzle. I have some consulting income (1099) paid to me monthly throughout the entire year. The company that pays me is headquartered in Illinois. Does that income get split between Illinois and Arizona based upon my official beginning work in Arizona date? Keep in mind, I have two residences, the new Arizona residence, plus the residence where my wife and kids live until they can move to Arizona after the school year. What do I do with full-year consulting income that is additional to my regular job income? The regular job (W2s) splits out easily, but the consulting income from the company in Illinois spans the entire year. Would I mark it as Illinois income because it is paid out of Illinois work or would it be split based upon where my permanent job is? As 'married filing separately' my wife's income in IL can be her own on her own state return for IL. But where would my consulting income go since it spans the whole year? Just Illinois, where it is technically earned or do I have to do the breakout and give Arizona a piece of, and then possibly California too though none of it is earned there?