California state tax with one NRA spouse

[user17568826280]

Hi,

My mom has green card and lives in California. My dad is a nonresident alien lives abroad. They both have foreign income (social security and bank saving interests) and don't have any US income. My mom files her tax "Married filing separately". As I understand, for her federal return, she can allocate 100% her income to herself. However, for her California return, I have some questions:

1. Can she still allocate all her income to herself or she has to allocate 50% to my dad?

2. If she must allocate 50% to my dad, my dad will have to file CA 540NR? So my mom would report half of her income on CA return and my dad would report the other half?

3. Does either of their CA return needs to include my dad's income?

Thanks in advance!

[pk]

@user17568826280 , 

First , starting with the federal income

        (a) As an US person ( GreenCard), she is taxed on world income, irrespective of source country. Thus all her income are part of her gross income for US tax purposes. Also to note is that any taxes paid to a foreign govt./taxing authority , may be eligible for foreign tax credit.  Tax treaty conditions may apply as far as taxability of  some foreign source incomes

        (b)  As a Non-Resident Alien, US taxes only his US sourced / connected income.  Thus his foreign income is NOT subject to US taxes.  This is ,of course, unless both husband and wife agree for the husband to be treated as resident for tax purposes ( his world income then comes under the ambit of US taxes) and thus MFJ status.

Second,  for California purposes  ( and noting that generally states tax income based on residency and/or connection to the state)

            (c) Since she is a resident of CA, her income would flow from the federal return and generally is worldwide income ( residency based ).  And since she is filing as Married filing separate / essentially "single" 100% of her income is taxed in California --- you cannot allocate when the person has no existence/connection to the state.

            (d)  Absent an agreement to be taxed as a resident, his income is outside the ambit of California taxation

Does this make sense ?   Is there more I can do for you ?

[user17568826280]

Thank you @pk. You comments makes sense.  I didn't make my question clear though. I was mainly asking regarding the community property tax situation as California is a community property state. By allocation I meant the percentage specified on form8958 (https://www.irs.gov/pub/irs-pdf/f8958.pdf), which is required when filing married separately in a community property state.

For my mom's federal return, she is allowed to allocation 100% of her income to herself as stated in publication 555 (https://www.irs.gov/publications/p555) section "Nonresident alien spouse" conforming to IRC 879 (I have a question on that as well, but later).

For her CA return, since CA doesn't conform to IRC 879, is my mom required to allocation 50% of her income to my dad? That would then requires my dad to file CA 540NR.

Sorry for not explaining clearly earlier. Please use these as the context to my original questions.

[pk]

@user17568826280  sorry for missing the point. I see where the issue is. My off the top reaction would be to NOT allocate anything to a "non-resident" but I need to research this -- because  in probate cases you indeed can leave your "non-resident" husband both as an executor and/or  inheritor.  There has to be some co-relation.  Please give me a day or two search case law and the text of the statute.  Sorry for my lack of  detailed knowledge on this.

Will be back

pk

[pk · Accepted solution]

@user17568826280 , 

 Having gone over the texts of  IRC 879 and California 760  etc.  and  reading a number of posts by tax attorneys  on the subject:

(a)  879 logically puts enforceable position that when one spouse is NRA ( and not living in the US ), community property should be allocated to the one that is actually performing the earning effort. Of course there are  ands/ifs./buts in this.  Note that by  allocating  income to the actual earning person, also supports the concept of sourcing where the work is performed, does not violate any tax treaties and the tax is collectable.

(b) While I recognize that  CA does not line up with IRC,  it is generally silent on what /how to allocate  when the NRA is not physically present in the US. Pursuing the statute literally would create a tax loss for the state, conflict with the federal return ( which is used generally as the basis of  the state  return) if the NRA is outside the USA, and has no financial connection to the US. The wording etc. of the statute generally seems to be based on the concept that married couples have a  de-facto connection to the state. The problem here is what happens when a couple is separated ( in fact / by action etc. ) but not divorced and not living and/or connected to CA. This gets even more contorted when one spouse  lives in another country, has no financial / otherwise connection to the spouse living in CA.  How does CA enforce the tax collection.

(c) I have seen some suggestions ( by tax attorneys)  to  use pre-nup and/or post-nup agreements.  What this would do is show intent / fact  of total financial separation between the spouses.

Given the above . my conclusion is that :

     1.  if the spouses maintain a total separation of income/ expenses,

      2.  do not live together,

      3.  have no  joint ownership of assets,

       4.  NRA spouse has NO CA source income

then one could argue  that an allocation like 879  would be logical.  Furthermore this  would also prevent tax loss for CA ( no way to enforce tax demand on NRA whom never visits the USA / California )

I have not found any case law on this.

My apologies for delay in response.

Does this make sense ?   Is there more I can do for you ?

[user17568826280]

Thank you @pk ! You comments make total sense. I agree making allocation following IRC 879 is the most logical.

I have several additional questions:

1. Part of my mom's income is interest from her saving accounts. These accounts are solely under her name and located in her home country (i.e. foreign to the US). IRC 879 enforces 100% allocation on earned income but leaves investment income (e.g. interest) up to the state law. Does that change your analysis? If my mom has to allocate 50% of the interest income to my dad, it would require my dad to file 1040NR?

2. If my mom allocates 50% to my dad which requires my dad to file 1040NR or 540NR,  it would be taxing a NRA on non-US sourced income. That seems to be against basic principles of NRA should only be taxed on US sourced income. Does this analysis make sense to you (you also mentioned this from enforcement perspective)?

3. According to this link, IRC 879 was enacted to prevent US person from avoiding tax by allocating 50% of income to NRA. Hence always allocating 100% to the US person should be a conservative/safe approach?

[pk]

@user17568826280  thank you for closing the loop.

My basic thought process here is to show that  neither IRS nor CA  are in a tax loss position.  Thus by keeping all world income attributable to the  Resident spouse  ( everything that bears her name directly or indirectly, no matter the type of income ) as recognized income, allows me to argue that this allocation is not for tax avoidance.  It also ,as a byproduct,  does not require  the NRA spouse to be taxed  on any Non-US sourced income.  This path does not violate  IRC 879 and generally complies with the CA being able to tax fully the Resident spousal income.

I am assuming here that the two spouses are de-facto acting as two single persons i.e. there is no co-mingling of  funds/ asset ownership etc.  and that they do not co-habitate for any appreciable length of time.  It is as if they have in place a post-nup agreement to keep[ all their incomes / assets distinct.  And the  NRA spouse has no financial connection with the US -- they just happen to married to each other  ( but have distinct  separate lives ).

IMHO

Does this close this query  or is there more I can do for you ?

[user17568826280]

@pk , yes, this answers everything I had. Thanks again for all your help!