You can file married-separate in Illinois so you don't have to file a tax return there.
If you file married-separate, you will need to prepare two federal tax returns, one for your spouse's Illinois return and one joint for federal and California, If you want to file married-joint on your federal tax return. You may find it better to purchase the desktop version of TurboTax if you want to file separate as you can do multiple returns using the same tax product.
While I was providing all the details including my residency and my wife's residency status, why did Turbo Tax Online asked me to file it via the software and not via online? I have already paid for the service. This is misleading and a very bad experience. I want Turbo Tax to help me with creating the right IL state tax return which I can send it via mail.
The reason that IL was asking for both your and your wife's residency is to confirm that you did not work or reside in IL. You did not have to file a married filing separate return in IL, as once you provided the residency information it was asking, your income would have been excluded from the IL return and would only have included your wife's information.
You would have then been able to file all returns online and not have had to do one via the software and one via online. By changing the filing status for the IL I believe this is what caused TurboTax to require the separate filing of one via the software and one via online.
TurboTax Online does allow you to file more than one state return, you just pay an additional fee for each e-filed state return.
Could you please share the steps on how to do it online? Because a tax expert sat with me for 2 hours and the online app did not allow me to file married-separately for IL state alone or skip filing my IL state residency dates. While filing jointly, IL state asked me my residency dates which I cannot skip. What residency dates should I put since I never lived in IL state? I have already paid for the IL state return.
You cannot create a married filing separate return in TurboTax for one person if you are filing a joint federal return.
You can create a separate online account for your spouse and prepare a married filing separate return. However you would have to pay for a second federal and state return—and you can't e-file because this return won't match your joint federal.
The best way is to download your tax file and create a mock return with just your spouse's income. You can use the numbers from this return to add the IL tax paid as a credit to your joint California return. IL will have to be mailed.
How do I prepare a joint federal return and separate state returns?
That seems the only way but would I have to pay for the software as well?
If you started out in the online version and you want to switch to the CD version, you will have to pay. Please see the information here for assistance in switching to the CD version.