CA State Tax and VA State Tax

[Totoro88]

My husband moved to VA in Jan 2023 while I stayed in CA.  In 2023, he is the non-resident in CA, has W2 from both CA and VA and some interest income.  I have 1099 from CA, some interest income and we have joint rental income in CA.  My understanding is we will file Federal return MFJ, CA tax return MFJ (540NR) and VA tax return MFS (Form 760 or 760PY). 

My question is 1) Do we do CA first, then VA?  Or Do we do VA first, then CA?  I want to make sure we don't get double taxing.  2) How to prepare it in TurboTax (Home & Business)?  3) Should my husband use VA Form 760 or 760PY? 

Thank you!

[TomD8 · Accepted solution]

You have a complicated situation.

If your husband moved to VA during the month of January, then for 2023 he is a part-year resident of both states.  When one spouse is a part-year resident of CA, you must file your CA taxes using Form 540NR.  If you file your federal return as MFJ, then you must use the same filing status on your CA return.

VA part-year residents who have income from both VA and another state must use VA Form 760PY.  Choosing your VA filing status is a bit complicated.  You can read the rules here regarding your options (click on "Part-year Residents"):

https://www.tax.virginia.gov/filing-status

CA Publication 1031, page 13, has a chart describing how to report income on CA Form 540NR when one spouse lives in CA, which is a community property state, and the other lives in a separate property state such as VA:

https://www.ftb.ca.gov/forms/2023/2023-1031-publication.pdf

Your husband's community property share of your income is considered CA-source income, and is thus taxable by CA.  Your husband will have income taxable by both CA (because it is CA-sourced) and by VA (because he received it after becoming a VA resident).  To prevent double-taxation, he may claim a credit on the CA return for the taxes paid to VA on the dollars taxed by both.  

CA and VA are reverse-credit states.  That means that the "other state credit" is claimed on the non-resident state return, which is the opposite of the usual practice whereby the resident state grants the credit.  Your husband must claim the credit on the CA tax return.  Virginia will not grant a credit for taxes paid to CA.  I believe that for the reverse-credit to be correctly applied in TurboTax, your VA return should be completed before you do the CA return.

https://www.tax.virginia.gov/credit-for-taxes-paid-to-another-state#:~:text=To%20help%20prevent%20pa....

Be sure to double-check your returns before you submit them to make sure that all looks correct.

[Totoro88]

@TomD8 
I have completed the Federal MFJ return.  Next need to work on VA 760PY for my husband, filing status #3 - Married, filling separate returns.  In order to get his AGI, I am creating a mock Federal MFS - husband's.  However, since he is domiciled in VA, do I need to add half of my income (from CA) to his mock Federal MFS to get his AGI?

For VA 760PY, could you please confirm if followings are correct?

1) His VAGI includes only his W2 from VA, all his interest / dividend regardless location of the banks, stocks gain / loss (exercised after moving to VA), and 50% of the rental income from CA property. 
2) He doesn't need to report 50% of my income (1099-NEC, Interest / Dividends) from CA. 
3) Because I am the nonresident in VA and no income from VA source, I don't need to file VA form 763.

Thank you!

[TomD8]

By California law each spouse owns half of all community income, and community income must be divided equally when filing separate returns.  That being the case, it appears that your husband's share of the community income would be taxable by his resident state of Virginia - since Virginia taxes its residents on any income that is taxable on their federal return.  Your husband's share of the community income is taxable on his separate federal return.

From the Virginia Administrative Code:

"For the purpose of determining Virginia taxable income, the term "federal taxable income" means all income from whatever source derived and however named on which a federal income tax is imposed."

https://www.law.cornell.edu/regulations/virginia/23VAC10-120-100

[Totoro88]

@TomD8 

I don't have W-2, but 1099-NEC which reported on Schedule C.  On my husband's Federal MFS, he has 50% of my net profit (Schedule C / item #31) as his share of community income.  Am I understanding this correctly? 

Thanks so much for answering my questions.

[TomD8]

@Totoro88 --

Correct, net earnings from self-employment are community property income and must be split 50%. 

[Totoro88]

@TomD8 

When mailing out the CA 540NR, do I need to include a copy of 760PY (VA)?  TurboTax only says to include a copy of Federal return, but I am not 100% sure since I do have CA schedule S to claim other state tax credit.  

Thank you!

[TomD8]

Yes, I would include a copy of the VA tax return with your mailing.