I live and work in Oregon but inherited money from California. I have a schedule K1 (541) California Schedule. Do I need to file a California Return for this?

[GeoffreyG]

The answer to your question is a multi-step process.

First of all, your Schedule K-1 (from federal Form 1041) income is taxable on a federal level by the IRS.

Second, because you are an Oregon resident, all of your (worldwide) income is taxable by Oreogn and the Oregon Department of Revenue, even if it is from a California source.

Third, California, unlike some other states, does not automatically consider income from the estate of a deceased California resident to be income "sourced" from that state.  In other words, simply because the deceased's estate is administered in California does not make the income therefrom California-source income for tax purposes.

Instead, please look to your California Schedule K-1 (541) and the beneficiary's instructions for further information on what is, and what is not, California-source income here.  In particular, please read the middle column on Page 1 of the following:

https://www.ftb.ca.gov/forms/2016/16_541k1ins.pdf

Fourth, if your California-source income (as determined by those rules) exceeds the filing threshold amount for California nonresidents, as shown and explained on this California Franchise Tax Board webpage, and accompanying income chart, then you will need to file a California nonresident tax return:

https://www.ftb.ca.gov/individuals/fileRtn/

Otherwise, if your California-source income does not exceed the filing threshold, then you do not have to file a California tax return.

Fifth, and finally, please remember as well that if you do have to file a tax return in California, to the extent that you are taxed on the same item(s) of income both by California and by Oregon, that you will be further eligible to claim a state taxes paid credit on your nonresident California tax return for such "double-taxed" income.

Thank you for asking this important question.

[KSK]

@GeoffreyG Thank you for that insightful answer. I have a similar situation being an Iowa resident with a CA 541 K-1. I also am the one preparing the 1041 and 541 and K-1s for the trust. (My California siblings are the other beneficiaries.)

The trust income is made up of interest (line 1) on the 541 K-1 and "other portfolio and nonbusiness income" (line 5). I read the instructions for the 541 and K-1 and I think this is intangible income and would not be California source income for non-residents. Do you agree? TurboTax Business did not seem to ask me any questions about CA source income but there is nothing in Column (e) for lines 1-14 in the 541 K-1's that I prepared using TurboTax Business. 

If it's not CA source income then I think I will not have to file a CA 540 based on the thresholds you mentioned, which would make me quite happy. Looking forward to your answer. Thank you.

[LindaB1993]

The form 541 is required under the following circumstances in California.

Decedent’s Estate. The fiduciary (or one of the fiduciaries) must file Form 541 for a decedent’s estate if any of the following apply:

• Gross income for the taxable year of more than $10,000 (regardless of the amount of net income)
• Gross income for the taxable year of more than $10,000 (regardless of the amount of net income)
• Net income for the taxable year of more than $1,000
• An alternative minimum tax liability

Trust. The fiduciary (or one of the fiduciaries) must file Form 541 for a trust if any of the following apply:

• Gross income for the taxable year of more than $10,000 (regardless of the amount of net income)
• Net income for the taxable year of more than $100
• An alternative minimum tax liability

Therefore no Form 540 will apply for the individual beneficiaries.