Current/former US expats: help me figure something out

[Trompe le Monde 1,107]

If you lived abroad, you know that you must still file a US tax return and you are exempt from paying US taxes on $85,000 of foreign earned income.

Now, for tax year 2005 I moved from the UK to California in September. On my federal return, I took my foreign income exemption. I did the same on my CA return. Now CA tells me that I owe tax on the entire amount I earned 2005, and that CA law does not include a foreign income exemption.

How exactly does state law trump federal law in this instance?

The official explanation from the Franchise Tax Board, is that California income tax is a "progressive tax" and mased on ability to pay. I maintain that calculating a strong currency (such as the pound was at that time) and figuring out the tax rate on the dollar amount is not necessarily a true measure of "ability to pay."

Do I really owe tax on my foreign income?

[Jenn! 918]

Sorry I don't have an answer for you. I was also abroad for about half of 2005, but MA requires you to report MA income only. Why do have to pay taxes to CA on income earned outside of CA?

[Otto 83]

You're going to need a tax attorney in Ca. - preferably someone familiar with foreign income. Ca. doesn't play around with taxes owed and interest/penalties and liens can take their toll.

[mawilson 2,133]

Silly question, but why did you even file CA taxes for tax year 2005 if you didn't live in CA?

[HAL 9000 96]

Hmmm...

I think that even if you are forced to pay CA tax... you should be able to recoup that amount on your Federal 1040 against any other liability for the half of 2005 you were in the states. Since you did the 1040 already, you may have to amend the tax return.

Now as for paying CA tax on earned income outside of CA... is pretty dicey. You should seek legal tax advice in CA... and hopefully you won't get jipped by the state. It does seem like someone in CA is making a mistake as to what income is taxable.

[Jenn! 918]

Not sure if this will help. It appears the rules in CA are much different than MA:

Example: California resident receives $20,000 from a rental building in Arkansas. They report only the $20,000 on the Arkansas non-resident form and pay $2,000 in tax to Arkansas on the non-resident form. Since the person is a California resident, California also taxes the $20,000 but gives a $2,000 tax credit on the California resident form.

Part-year residents follow each state's rules. Some states separate the income, and tax only their state's income. Or a state may calculate the tax on all income as if you are a resident and then allocate the tax based on "in state sources/all sources."

http://turbotax.intuit.com/tax-tools/state...rticle#resident

[mawilson 2,133]

You shouldn't have filed a state return to begin with if you didn't live in CA, unless you did something

to lead the state tax authorities to consider you domiciled in the state. Did you maintain a

home in CA? Vote in state elections? Had a state driver's license or a registered vehicle?

If the answer is 'no', the state gets nothing.

Edited December 15, 2008 by mawilson

[Trompe le Monde 1,107]

Silly question, but why did you even file CA taxes for tax year 2005 if you didn't live in CA?

you saw the part where I said I moved in September? Actually, scratch that, filling out tax returns is a hobby of mine.

Not sure if this will help. It appears the rules in CA are much different than MA:

Example: California resident receives $20,000 from a rental building in Arkansas. They report only the $20,000 on the Arkansas non-resident form and pay $2,000 in tax to Arkansas on the non-resident form. Since the person is a California resident, California also taxes the $20,000 but gives a $2,000 tax credit on the California resident form.

Part-year residents follow each state's rules. Some states separate the income, and tax only their state's income. Or a state may calculate the tax on all income as if you are a resident and then allocate the tax based on "in state sources/all sources."

http://turbotax.intuit.com/tax-tools/state...rticle#resident

That example refers to rental income - which makes sense that you might owe tax on it. But for earned income it seems quite silly.

I get "progressive tax" if you are comparing dollars to dollars - but this is not the case here.

[mawilson 2,133]

Silly question, but why did you even file CA taxes for tax year 2005 if you didn't live in CA?

you saw the part where I said I moved in September? Actually, scratch that, filling out tax returns is a hobby of mine.

Most states use a physical presence test (normally based on days) to determine whether

you are a resident in the state. For example, New York state considers you a resident if

you spend more than 183 days of the tax year in New York. I'm sure California has a

similar rule.

[Jenn! 918]

That example refers to rental income - which makes sense that you might owe tax on it. But for earned income it seems quite silly.

I agree, but they seem to be clear that any income earned outside of the state must be declared in CA.

[Trompe le Monde 1,107]

Silly question, but why did you even file CA taxes for tax year 2005 if you didn't live in CA?

you saw the part where I said I moved in September? Actually, scratch that, filling out tax returns is a hobby of mine.

Most states use a physical presence test (normally based on days) to determine whether

you are a resident in the state. For example, New York state considers you a resident if

you spend more than 183 days of the tax year in New York. I'm sure California has a

similar rule.

Yes, they do. I earned income in CA for tax year 05 and therefore had to fill out a return.

The question is how they calculate the tax for that income based on total income earned for the tax year. Under federal law, I have a foreign earned income exclusion. CA is saying that federal tax law doesn't apply in this state.

[mawilson 2,133]

Criteria for Determining California Residency

I think you should argue that you were not a California resident in 2005, and therefore do not owe them any tax.

Yes, they do. I earned income in CA for tax year 05 and therefore had to fill out a return.

Ah. That is a problem. Employment is a strong indicator of residency.

[Trompe le Monde 1,107]

What I don't understand is how foreign earned income the IRS (at the federal level) does not consider part of my tax liability but somehow state law trumps this when determining state income tax? Somehow it doesn't seem right.

[mawilson 2,133]

What I don't understand is how foreign earned income the IRS (at the federal level) does not consider part of my tax liability but somehow state law trumps this when determining state income tax? Somehow it doesn't seem right.

Not all federal deductions are recognized as deductions for state income tax purposes

(and vice versa.)

For example, same-sex couples in California can file their state taxes like married people

but must continue filing their federal taxes as single or head of household.

[himher 634]

That does not sound right.

Did you fill out the part-year resident form or the resident form? On the part-year resident return, you declare your total income (1040 income), then enter your Ca income only. You take a ratio'd standard deduction aka if your Ca income was 1/3 of your total, then you get 1/3 of your standard deduction. The CALIFORNIA income minus the ratio'd deduction is the income taxable in California.