California Non-Resident Form 540NR: Excluding Husband’s non-California Income with Separate Property Prenup in TurboTax

[asdfg1234]

Background:
My husband and I are both Texas residents with a valid separate property prenuptial agreement, ensuring all income is treated as separate property. My husband’s income is entirely sourced outside California, while nearly all my income is sourced from California. We plan to file our federal tax return as "married filing jointly."

Issue:
TurboTax defaults to suggesting a joint California non-resident return (Form 540NR) for us. However, this seems suboptimal because California:

• Uses our total federal income (including my husband’s non-California income) to determine the California tax bracket, rather than only my California-sourced income.

• Prorates deductions and credits based on the ratio of California-sourced income to total federal income.

Since our prenuptial agreement designates all income as separate property, I believe my husband’s income should not be included on my Form 540NR to optimize my California tax liability (e.g., lower tax bracket, higher deductions/credits).

Questions:

1. With a valid separate property prenuptial agreement, can I file my Form 540NR without including my husband’s income, reporting only my California-sourced income?

2. If so, does my husband need to file a separate Form 540NR, given he has no California-sourced income?

3. if so, how can I configure TurboTax to exclude my husband’s income from my Form 540NR (e.g., override the default joint filing suggestion)?

Any guidance on TurboTax settings or California tax rules would be greatly appreciated!

[MaryK4]

If you file a separate California state return, your husband's income will not be included.  See How do I prepare a joint federal return and separate state.

The California taxable income of a part nonresident individual is calculated as if all income were earned in California.  The Federal Adjusted Gross Income (AGI) will be adjusted using the California adjustments to arrive at AGI from all sources. The AGI from all sources is used to determine the taxable income. After the taxable income is calculated, it is prorated using a percentage of the AGI from California sources divided by the AGI from all sources. This prorated tax is the California tax. If you file a joint California return, you are subject to this calculation.

[asdfg1234]

"If you file a separate California state return, your husband's income will not be included." <-- is because we have separate property prenuptial agreement even though we live in community property state? If yes, would we need to send prenuptial agreement to FTB together with our tax return?

[DawnC]

No, you can file a separate return in CA because your husband has no CA income.   A separate return only includes one spouse's income.  When you prepare the MFS CA return, you will report only your share of the income reported on your federal return.

Generally, CA requires you to use the same filing status as you did on your federal return, but there are 2 exceptions.  If you file a joint return for federal purposes, you may file separately for California if either spouse was one of the following:

• An active member of the United States armed forces or any auxiliary military branch during the year
• A nonresident for the entire year and had no income from California sources during the year   

From IRS Pub 555 - Generally, separate property is: 

• Property that you or your spouse (or your RDP) owned separately before your marriage (or registered domestic partnership); 

• Money earned while domiciled in a noncommunity property state; 

• Property that you or your spouse (or your RDP) received separately as a gift or inheritance during your marriage (or registered domestic partnership); 

• Property that you or your spouse (or your RDP) bought with separate funds, or acquired in exchange for separate property, during your marriage (or registered domestic partnership); 

• Property that you and your spouse (or your RDP) converted from community property to separate property through an agreement valid under state law; and 

• The part of property bought with separate funds, if part was bought with community funds and part with separate funds.