CA nonresident and remote work

[ali21471]

@Opus 17 

@TomD8 

Sorry for the Cut and Paste - My first time posting and I was not sure if this would show under the original post.

So how does this work with the Canada/US Tax Treaty? If the contractor files a zero federal return for the US you are saying they would still file a NR return for california?

[ali21471]

@Opus 17 @TomD8 The contractor lives/works in Canada in reference to my question.

[TomD8]

@ali21471 --

See Section K on page 10 of this California tax publication regarding foreign residents with income from California sources:

https://www.ftb.ca.gov/forms/2022/2022-1031-publication.pdf

[ali21471]

@TomD8 

Ok - so since the contractor has income from a California source - even though the work is not performed in California, but in Canada, it is still CA Taxable.  Is this how you read that?

[TomD8]

That’s how I read it.

[ali21471]

@TomD8 Thanks for all your thoughts and time on this! Truly appreciated!

[Opus 17]

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@ali21471 wrote:

@TomD8 Thanks for all your thoughts and time on this! Truly appreciated!

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If you are not a US citizen or resident, you won't be able to use Turbotax to prepare the California NR return.   I'm not sure how you would do that, you might need to do it by hand from the paper forms and instructions, or hire a local professional.  Good luck. 

[TomD8]

@ali21471 's previous posts implied that she is a green card holder.  An individual who obtains a green card is treated as a lawful permanent resident and is considered a U.S. tax resident for U.S. income tax purposes.

https://www.irs.gov/individuals/international-taxpayers/tax-information-and-responsibilities-for-new...

[ali21471]

@TomD8 But they would be non resident if living and working in Canada (their original country), yes?

[Opus 17]

If @ali21471 has a green card, they are considered a permanent resident of the US, and are subject to ALL US tax laws, regardless of where in the world they happen to live or perform work.

If you are a U.S. citizen or green card holder living in Canada, you still have to file a Form 1040 and report your worldwide income be- cause of the “saving clause” in Article XXIX(2), which allows the United States to tax its citizens and residents as if the treaty had not entered into effect. There are limited exceptions to the saving clause, which means certain types of in- come may be exempt from tax in the United States. Exceptions to the saving clause can be found in Article XXIX, paragraph 3.

https://www.irs.gov/pub/irs-pdf/p597.pdf

That means they file a full form 1040 tax return to report and pay tax on all their world-wide income , and in this case, a California non-resident return to report and pay tax on their income from California sources, including clients.  (They would also file a resident state tax return if they maintain and permanent residence or "domicile" in another US state, even if they didn't live in the US all year.). They can claim a foreign tax credit on their federal tax return if Canada taxes them on the same income, but there is nothing similar that would avert or reduce the California tax on California-sourced income.

I was a bit confused because the question "What if I live in Canada" would have a someone different answer depending on whether the taxpayer was a US resident/citizen or not. 

[Opus 17]

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@ali21471 wrote:

@TomD8 But they would be non resident if living and working in Canada (their original country), yes?

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As far as I know, once you get a green card, you are considered a US resident and are subject to US tax laws all all time on all your world-wide income.  That's one of the costs you pay for the benefits of US residency.

If you think you are somehow exempt once you move back home, I would have to see that in writing.  (If you surrender the green card, you are no longer a considered a resident.)

[ali21471]

@Opus 17  that being said, I am reading through info on the tax treaty between the US and Canada and the elimination of double taxation.  It applies to federal (which makes sense to the contractor filing a zero federal return as they pay taxes in Canada), but I do not see anywhere a statement with respect to individual state taxes.  From my research so far, California seems to be able to tax those earnings separately, but if they pay in Canada, would that credit not apply to a California NR return?

[TomD8]

"But they would be non resident if living and working in Canada (their original country), yes?"

With regard specifically to your California state income tax obligations, yes, you would file your California state tax return as a non-resident of California.

Your federal tax obligations to the U.S. and/or Canada are a separate issue, and would be determined by the laws of each country and by the U.S. - Canada tax treaty.

[Opus 17]

@ali21471 

States have agreements with other states.  I don't know every California tax law, but I doubt California has a private agreement with Canada or your province.   (I don't even think a state could legally make an agreement with a province. That seems to violate the US constitution, which puts treaties exclusively in the hands of the federal government.)

For your federal tax return, "foreign taxes" include taxes imposed by the Canadian government as well as your provincial taxes.

A foreign country includes any foreign state and its political subdivisions. Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit.

https://www.irs.gov/individuals/international-taxpayers/foreign-taxes-that-qualify-for-the-foreign-t...

This may help up to a point. Your maximum US credit will be whatever your US tax was.  In other words, if your US tax was 22% and your Canadian tax was 25%, adding provincial tax will not get you a bigger credit on your federal return.  But if your US tax was 22% and your Canadian tax was 20%, adding your provincial tax might bring you up to the 22% level (the US credit will never be more than the foreign taxes, but the provincial taxes are included in "foreign").

But provincial taxes won't reduce your California state taxes.

[TomD8]

@ali21471 --

With regard to your U.S. federal  tax obligations, I lifted the following from this website: https://www.taxnotes.com/featured-analysis/canada-us-tax-treaty-and-americans-canadian-source-income...

"Under Article IV of the Canada-U.S. tax treaty, the United States has further guidance for dual residents determined to be Canadian under the tiebreaking rules. If a person is determined to be Canadian but has a U.S. green card, the person can claim the benefits of the treaty and be treated by the United States as a nonresident for U.S. income tax purposes. This means the person will only be taxed on the U.S.-source income and not the person’s worldwide income. However, the person must file a timely nonresident U.S. income tax return (Form 1040NR or 1040NR-EZ) and must disclose the treaty position by filing Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).”¹¹

I would note that TurboTax does not include Form 8833.