Is my wife a non-resident of Illinois and should we file MFS or MFJ for state taxes? (details below)

[Vijay]

I’d appreciate it if you can help me out with this multiple state-tax query.

Both me and my wife have our home in CA (our DLs, bank accounts, mailing address etc., are all in CA, and our kid goes to pre-school in CA), but my wife took up a temporary job opportunity in IL and lived there (renting an apt) for a portion of 2016 (05/01 – end of year). Overall, she spent more time in CA than IL.

Given this situation, I am trying to figure out the best way to handle our state taxes:

There are two questions I am not clear about:

1. Is my wife a resident or non-resident of IL? Reading the rules on IL tax website, it looks like she is a non-resident for tax purposes because (1) she will be a resident of CA, (2) her stay is temporary. Please correct me if wrong.
2. Regardless of my wife’s residency status, is it advisable for us to use MFS status for state tax returns? My income (salary, stock options etc.,) is substantially higher than my wife’s, so by filing MFS, I might be paying a lot of more state taxes. But, on the other hand, given that CA is a community property state, the disparity in income is probably not a factor in the tax calculation.
1. As a corollary to #2, if we file as MFJ in CA, and my wife files MFS in IL, can we still get CA credit for takes paid to IL in some form?
2. Or, can we simply file MFJ (resident) in CA and MFJ (non-resident) in IL and take credit for taxes paid to IL?

I appreciate any help or guidance!

Thanks in advance!

[DanielV01 · Accepted solution]

Married Filing Joint is probably your best filing status, both for Federal and California.  I'll get back to more on your Federal return shortly, because you may have additional deductions you're not aware of.  But suffice to say that you have greater access to deductions and credits, you avoid the community property headache, and, if your income and deductions are high (which they might be), a more generous treatment for the dreaded AMT (Alternative Minimum Tax).

Having said this, let me answer your direct questions:

1. Yes, you are correct.  It could be splitting hairs a bit because many states will call you a resident if you had a physical presence in the state of 183 days or more and maintained a residence.  She maintained a residence in Illinois, but may be close on the physical presence (especially if she was back and forth a bit).  But you will run into major complications if you must file an Illinois resident return since she is also a California resident (where her main home, or domicile, is).  You will want to prepare the Illinois return first, as this FAQ explains:  https://ttlc.intuit.com/replies/3302052
2. You will want to file Married Filing Joint in both California and Illinois.  California is your state of residence for the two of you, so they are going to tax all of your income no matter what.  You won't gain an advantage filing MFS for that reason, and you have listed a few others why it might not be a good idea.  Illinois, likewise, requires that you file a joint return in this circumstance.  They would allow for a separate return if she is filing a resident return which is another reason why you want to file the Nonresident return (it's a lot more work to do the resident return).  How Illinois will calculate the tax is that they will look at what they would tax your entire income as Married Filing Joint and then calculate the amount of tax proportionate to your wife's Illinois income.  But, as a corollary to this, yes, California will give you a credit for the amount of tax you pay to Illinois for the amount of income earned in Illinois.

Now, for the Federal return, there is another potentially large deduction you may be entitled to.  Since she was working in a temporary location, the IRS does allow for some substantial deductions for those who are in these situations.  Any deduction claimed must be reduces by any reimbursements paid by her company.  For a full consideration of this, please see this IRS Publication:  https://www.irs.gov/publications/p463/.  Chapter 1, Travel, and Chapters 4 and 5 you'll find especially useful.  Take the time to go through it so you can claim everything you are entitled to.  Feel free to ask more questions and I'll be happy to assist you with them.  To enter these expenses in TurboTax, you will use Form 2106, described in this FAQ:  https://ttlc.intuit.com/replies/4800418

[Vijay]

Wow... That was a very detailed and helpful answer. Thank you very much. I just have one followup question: (1) Is the 183 day rule mentioned anywhere in the tax docs? If I can prove CA residency (which should be easy) + less than 183 days spent in IL, will it be sufficient, or is the IL residency situation more subjective?

[DanielV01]

You are actually in good shape.  When I looked this up yesterday I thought about the 183 days because many states have that rule.  Illinois, however, does not consider your wife a resident because she was not domiciled there ALL YEAR.  No splitting hairs; she is a nonresident.  Here is the Instruction Manual (see page 3):  <a rel="nofollow" target="_blank" href="http://tax.illinois.gov/TaxForms/IncmCurrentYear/Individual/IL-1040-Instr.pdf">http://tax.illinois.g...>