How to deal with China Tax Treaty for California tax?

[angelalen21]

Hi, I lived in California the whole year 2019 and my University has exempted $5000 China Tax Treaty from my income. My wife lived part-time in CA and she got a $5000 China Tax Treaty exempted in IN in the first 3 months in 2019.  My question is do we need to add $5000 or $10000 back to AGI when calculating the California tax since my wife's $5000 is not earned in CA? 

[hbl3973 · Accepted solution]

I haven't looked at TurboTax itself to see how to enter the information, indeed I always do my taxes on paper and just use TT to double check my numbers, but the bottom line is that both IN and CA use a "unitary taxation" method in which a tax is first calculated on the total income, irrespective of residency and the prorated according to the amount actually earned in the state.  IN does exclude the China tax treaty income from state taxation, CA does not.  Your total income according to IN does not include the $10K, but does include it for CA's notion of total income.  Your state income according to IN also does not include the $10K, but $5K of it is included in CA's state income.

[angelalen21]

Thanks for your reply. I guess I need to add $10k to the total income when filing the CA tax, and only add $5k to my earning as the CA's state income.  

[hbl3973]

Correct.

[shiyi11]

@hbl3973 

Great answer, helped me a lot too. MA allow me to exempt the 5000, CA does not.

Do you know the 50 states which states do the "unitary tax" system?

Many thanks!

[hbl3973]

Sorry,  I don't have a list but of course it doesn't include states that either don't have income tax at all and states.  States that have a flat tax rate independent of income will basically end up calculating the same tax whether or not they start with the federal income.  (There could well be some differences if the state offers a standard deduction or exemption credits that have to be apportioned between states.)  You'd want to go to the income tax site of a state in question and look at the part-year resident form and instructions to see how they go about the calculation.