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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120799  
Subject: Captial Gains for State Return Date: 3/12/2006 4:39 AM
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I have capital gains from stock sales for 2005 from a brokerage account I hold jointly with my wife. Now here is the situation -- I was CA resident for entire 2005 while my wife was FL resident for the same duration. While filing CA state return, which state do I show the gains in -- CA or FL? If I include the gains in my CA income, it will increase my state taxable amount, which I would obviously like to avoide if I am entitled to.
I am filing MFJ.
Any help in this regard will be greatly appreciated.
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84862 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 7:44 AM
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I have capital gains from stock sales for 2005 from a brokerage account I hold jointly with my wife. Now here is the situation -- I was CA resident for entire 2005 while my wife was FL resident for the same duration. While filing CA state return, which state do I show the gains in -- CA or FL?

Sounds half and half to me, but wait for Peter, our resident CA expert.

Phil

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84863 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 8:22 AM
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I have capital gains from stock sales for 2005 from a brokerage account I hold jointly with my wife. Now here is the situation -- I was CA resident for entire 2005 while my wife was FL resident for the same duration. While filing CA state return, which state do I show the gains in -- CA or FL? If I include the gains in my CA income, it will increase my state taxable amount, which I would obviously like to avoide if I am entitled to.
I am filing MFJ.
Any help in this regard will be greatly appreciated.


As I read the CA 540 instructions, if you had any CA-source income in 2005 and you're filing MFJ at the federal level, you must file MFJ in CA and include all of the capital gain. The specific sections of the instructions that I am looking at are on page 9 -- the discussion of community property rules. I'm not an expert on CA taxation, so as Phil stated, perhaps Peter can provide more light.

Ira


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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84867 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 1:06 PM
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Why can't it be claimed as "non-CA source" income or "FL source" income -- just because the account was "joint" and I am CA resident? What about the fact that my wife was a FL resident (CA non-resident thruout)? Does it just boil down to mere technicality of what kind of account it is? If so, I might as well have carried out all transactions from my wife's individual account and we would have been able to save all the state income tax on those gains (FL does not have any state income tax), correct?

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84869 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 2:35 PM
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Why can't it be claimed as "non-CA source" income or "FL source" income -- just because the account was "joint" and I am CA resident? What about the fact that my wife was a FL resident (CA non-resident thruout)? Does it just boil down to mere technicality of what kind of account it is? If so, I might as well have carried out all transactions from my wife's individual account and we would have been able to save all the state income tax on those gains (FL does not have any state income tax), correct?

As I read the CA-540 instructions, if you have any CA-source income (stock capital gains are NOT CA-source income), your wife cannot claim to be a non-resident of CA because it's a community property state. So, it appears to me as though your wife will have dual residency, CA and FL. Again, I am not a CA-tax expert, but what exposure I've had to the CA FTB has taught me that they are extremely aggressive at classifying income as taxable to CA.

Ira


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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84870 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 3:18 PM
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As I read the CA-540 instructions, if you have any CA-source income (stock capital gains are NOT CA-source income), your wife cannot claim to be a non-resident of CA because it's a community property state. So, it appears to me as though your wife will have dual residency, CA and FL. Again, I am not a CA-tax expert, but what exposure I've had to the CA FTB has taught me that they are extremely aggressive at classifying income as taxable to CA.


I AM talking about stock capital gains. As you mentioned above, they are not CA-source income, correct? So can I exclude those gains from my CA returns?

Where I am coming from is this -- What if FL Also had state income tax? Would we then have had to pay taxes on the same gains in 2 states? Wouldn't we get the option of choosing which state to pay taxes in, depending upon which one is lower? I am using the same logic, just that in this case, the lower of the two tax rates happens to be zero.

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84871 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 3:36 PM
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if you are a ca resident, any capital gains on stock, dividends, and any interest from banks will be taxed to your state of residency as if it were esrned there - regardless of where it is 'sourced'. if you, as a CA resident, have a bank account in FL, that interest income is treated as CA interest income. The most you will get out of CA is the ability to take a credit for taxes paid to another state.

The interesting thing here is that since you are married, even if your wife lives and works in florida, CA might think they have a claim on all your (together) income.

If you are a resident, many states treat you as 'theirs'. think of it like the IRS...you may go an earn money anywhere in the world, but as a US citizen you owe your tax on your worldwide income to the IRS. They give you an exclusion up to $75k if you meet certain requirements and allow some credit for foreign taxes paid, but that doesn't mitigate the fact that your responsibility is to pay tax to the US for all your income whatever the source.

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84872 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 3:37 PM
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as a part-year resident or non-resident, you could say the cap gains, interest and div are 'non-CA source'. As a CA resident you do not have that luxury

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84873 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 4:12 PM
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if you are a ca resident, any capital gains on stock, dividends, and any interest from banks will be taxed to your state of residency as if it were esrned there - regardless of where it is 'sourced'. if you, as a CA resident, have a bank account in FL, that interest income is treated as CA interest income. The most you will get out of CA is the ability to take a credit for taxes paid to another state.


Granted that I am a CA resident, but my wife is not. And the gains are her income too. And Turbo tax software is giving me the option to include only those gains in CA income which I think are CA sourced.

I did not get the answer to my question. What if my wife had been a resident of some other state that did charge state income tax, say for example NJ. Are you saying NJ as well as CA had a legitimate claim of taxes on the same gains that we earned? That does not make sense. We will be paying taxes more than once on the same income. Also, what if all the income would have been earned from an individual account solely owned by my wife as opposed to joint account. In that case, would NJ claim taxes on that amount as well as CA? How is that sensible?


The interesting thing here is that since you are married, even if your wife lives and works in florida, CA might think they have a claim on all your (together) income.

If you are a resident, many states treat you as 'theirs'. think of it like the IRS...you may go an earn money anywhere in the world, but as a US citizen you owe your tax on your worldwide income to the IRS. They give you an exclusion up to $75k if you meet certain requirements and allow some credit for foreign taxes paid, but that doesn't mitigate the fact that your responsibility is to pay tax to the US for all your income whatever the source.



Even putting on the IRS cap, it does not make sense. They cannot tax the same income twice in two different states simply because spouses happen to be residents of 2 states.

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84874 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 4:14 PM
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as a part-year resident or non-resident, you could say the cap gains, interest and div are 'non-CA source'. As a CA resident you do not have that luxury


My argument is still the same. I may be resident in CA, but my wife is not. What if FL, where my wife is resident, also said that same thing about the same income? Would we pay them as well as CA?

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84875 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 4:41 PM
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Granted that I am a CA resident, but my wife is not. And the gains are her income too. And Turbo tax software is giving me the option to include only those gains in CA income which I think are CA sourced.

I did not get the answer to my question. What if my wife had been a resident of some other state that did charge state income tax, say for example NJ. Are you saying NJ as well as CA had a legitimate claim of taxes on the same gains that we earned? That does not make sense. We will be paying taxes more than once on the same income. Also, what if all the income would have been earned from an individual account solely owned by my wife as opposed to joint account. In that case, would NJ claim taxes on that amount as well as CA? How is that sensible?


Often, taxpayers are residents of two states simultaneously. Even more often, two states tax the same income. Sometimes, but not always, one state will allow you to take a credit for taxes paid to another state on dually-taxed inocme. It isn't sensible and doesn't have to be. Income tax rules rarely are.

Until Peter weighs in with his opinion, my reading of the CA instructions leads me to believe that the only way to avoid taxation of all of your combined income in CA is for you to leave CA or to cease receiving any CA-source income (employment or business income, or income derived from tangible assets).

Ira

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84878 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 7:41 PM
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Yikes. Take a little time off and all hell breaks loose. OK. Here's my take.

It is entirely possible for one spouse to be a CA resident and one not. The FTB may not like it, but if that's the way you have arranged your life, it's OK.

Since you're a CA resident, I'm pretty sure the community property rules will come into play. So you'll need to look at whose money it is that enjoyed the capital gain. Is it identifiable as separate property of one spouse or the other, or is it part of the community?

Assuming that we can nail it down as separate property, it's easy. If it's the CA spouse's gain, it is taxable to CA. If it's the FL spouse's gain, its not taxable to CA.

For community property, I'd take a different tack. I'd report 1/2 of the gain in each state - CA and FL. (Of course, reporting 1/2 of it in FL is rather moot since they don't have an income tax.)

You will need to use the CA non- and part-year resident form, 540 NR. As you work through it, you'll find that you need to do two things. First, you need to report ALL of your joint worldwide income using CA rules. You might need to adjust some items to do that - like the state tax refund isn't taxable, nor are your state income taxes deductable. Once you do that, you get to your CA law AGI and itemized deductions.

Then you go back and identify all of your income items as either CA source or non-CA source. Here's where things get funny. Remember that we've got to deal with community property issues. And since you're married your wages are community property. 1/2 of your wages are CA income and 1/2 are FL. Likewise with your spouse. 1/2 of her wages are FL income and 1/2 are CA. (I did mention this was fun, didn't I?)

Then you get to play the same game with all of your other income sources: interest, dividends, capital gains, and so on. If they're community property, it's 1/2 CA and 1/2 FL. If they're separate property, they go to the state where the spouse is resident.

The main twist to all of this would be for rental real estate. Any property that is located in CA will be fully included in your CA source income. Property located outside of CA will follow the general flow above based on whether it's community or separate property.

Once you've done all this, you'll get a ratio of your total income (using CA laws) to your CA source income. Then you'll calculate your CA tax based on your worldwide income (and deductions) and apply that ratio to the tax to come up with your actual CA tax.

Having fun yet? Good, cause we're not over. You use a slightly different ratio to figure out your exemption credit. Instead of a deduction from income like the $3k personal exemption on the federal return, you get an exemption credit that reduces your tax.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84879 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 7:57 PM
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Peter,

Welcome back. My only question is the section of the CA540 instructions that states that if the non-resident spouse has any CA-source income due to community property rules that spouse cannot file as a nonresident.

Ira

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84881 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 8:04 PM
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My only question is the section of the CA540 instructions that states that if the non-resident spouse has any CA-source income due to community property rules that spouse cannot file as a nonresident.

Hmmm. I'll have to take a look at that. But at the moment, I've got to go do some family stuff - out-of-town guests and all.

I'll check back in later - but it might take a day or two.

--Peter

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84883 of 120799
Subject: Re: Captial Gains for State Return Date: 3/12/2006 9:28 PM
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Assuming that we can nail it down as separate property, it's easy. If it's the CA spouse's gain, it is taxable to CA. If it's the FL spouse's gain, its not taxable to CA.


I was hoping for that answer, which sounds very reasonable.


For community property, I'd take a different tack. I'd report 1/2 of the gain in each state - CA and FL. (Of course, reporting 1/2 of it in FL is rather moot since they don't have an income tax.)

Exactly


You will need to use the CA non- and part-year resident form, 540 NR. As you work through it, you'll find that you need to do two things. First, you need to report ALL of your joint worldwide income using CA rules. You might need to adjust some items to do that - like the state tax refund isn't taxable, nor are your state income taxes deductable. Once you do that, you get to your CA law AGI and itemized deductions.


I am assuming Turbotax does that all very efficiently.


Then you go back and identify all of your income items as either CA source or non-CA source. Here's where things get funny. Remember that we've got to deal with community property issues. And since you're married your wages are community property. 1/2 of your wages are CA income and 1/2 are FL. Likewise with your spouse. 1/2 of her wages are FL income and 1/2 are CA. (I did mention this was fun, didn't I?)

Then you get to play the same game with all of your other income sources: interest, dividends, capital gains, and so on. If they're community property, it's 1/2 CA and 1/2 FL. If they're separate property, they go to the state where the spouse is resident.


Ok. Makes sense, but that brings to me to my earlier questions
"Does it just boil down to mere technicality of what kind of account it is? If so, I might as well have carried out all transactions from my wife's individual account and we would have been able to save all the state income tax on those gains (FL does not have any state income tax), correct?"
I mean, if I make all transactions from my wife's individual account for year 2006, all the gains that arise of those would NOT be taxable in CA.

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84890 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 1:43 AM
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TurboTax *will not* handle things like this efficiently or at all. Since you may be risking having your total family income (including your spouses) recharacterized as CA income if you claim such a split and it is scrutinized and found done incorrectly - seek professional help. I had some experience with similar in NY-VA-HI, and if by some small chance you get audited and then the split is not bulletproof and substantial spousal income gets captured the interest and penalties will make your head spin (i have seen letters where a tax liabilty of $20K becomes $50K with i&p).

The scenario outlined above is you best case hope. The big problem now is that you are looking to do this now that the tax year has closed...the facts have already been written. If something doesnt fit you may be hosed. The time to ask what are the tax ramifications is after a life even change (marriage; change of state of residence; etc) and find out what can be done. then use the remainder of the year structuring your affairs in a tax advantaged manner that makes sense.

also, *big* point: when he says where the income is sourced is not just a matter of "we did the transactions through my wife's account'. if you put money into her brokerage account, in her name alone, and made a huge gain, when push comes to shove if a CA auditor wants some of that all he has to do is show some of your CA sourced wage $ went into her account (say, via check). Tax authorities are very adept at looking past 'technicality' to get at the economic basis or spirit of the transaction.

You can structure your life that way that can exclude a lot/most cap gain/div/int income from the CA tax. but you need to understand the principles in advance and apply it throughout the year - ie, forget about 2005.

I know i sound like chicken little. but a little research and prof advice now will go a long way, since it will affect how you report year in and out. and income and its source is easy for the auditor to validate (except for those self employed in cash businesses - the IRS has a perpetual red flag on those for that reason).

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84891 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 1:52 AM
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"First, you need to report ALL of your joint worldwide income using CA rules"

"the CA540 instructions that states that if the non-resident spouse has any CA-source income due to community property rules that spouse cannot file as a nonresident"

these 2 statements alone should concern you enough to seek professional advice.


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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84894 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 2:09 AM
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"Granted that I am a CA resident, but my wife is not. And the gains are her income too. And Turbo tax software is giving me the option to include only those gains in CA income which I think are CA sourced.

I did not get the answer to my question. What if my wife had been a resident of some other state that did charge state income tax, say for example NJ. Are you saying NJ as well as CA had a legitimate claim of taxes on the same gains that we earned? That does not make sense. We will be paying taxes more than once on the same income. Also, what if all the income would have been earned from an individual account solely owned by my wife as opposed to joint account. In that case, would NJ claim taxes on that amount as well as CA? How is that sensible?


The interesting thing here is that since you are married, even if your wife lives and works in florida, CA might think they have a claim on all your (together) income.

If you are a resident, many states treat you as 'theirs'. think of it like the IRS...you may go an earn money anywhere in the world, but as a US citizen you owe your tax on your worldwide income to the IRS. They give you an exclusion up to $75k if you meet certain requirements and allow some credit for foreign taxes paid, but that doesn't mitigate the fact that your responsibility is to pay tax to the US for all your income whatever the source.



Even putting on the IRS cap, it does not make sense. They cannot tax the same income twice in two different states simply because spouses happen to be residents of 2 states."

each state makes it's own rules to define if you are a resident. the worst thing is to quality as resident in two. then they will both take all they can, under their own rules. reasonableness plays not part.

one example: did you know your wife may live 365 days a year in FL, but if she owns a condo in NYC they can make a claim that she is a resident and tax her? all that is required is that she maintain a dwelling there. in practice taxing authorities can be reasonable but should they decide not to be, the way the rules are written gives them a lot of room to squeeze.

from what i have seen, since you are a CA resident, and your wife is *married* to a CA resident - that puts her in their reach as well, if they want to pursue it. you will have to actively avoid it to keep them at bay.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84896 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 2:42 AM
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damastr writes (in part):

Does it just boil down to mere technicality of what kind of account it is?

I reply:

No. But it may boil down to the not-so-mere technicality of the original source of the funds in the account. If that source was separate property, it gets one treatment. If it was community property, it gets another. --Bob

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84928 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 2:06 PM
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My only question is the section of the CA540 instructions that states that if the non-resident spouse has any CA-source income due to community property rules that spouse cannot file as a nonresident.

After looking through some instructions and source material, I can't find that statement.

I do, however, see one dealing with filing joint or separate returns.

Normally, you have to use the same filing status on your CA return that you use on your Federal return. However, there is an exception for a spouse that was a non-resident for the entire year AND who has no CA source income. (And there is another dealing with members of the military.) In that situation, you can file a joint federal return, but a separate CA return.

The caveat here is that if either spouse is in a community property state AND there is CA source community property income, then both spouses will have CA source income. So the MFJ federal but MFS CA return is not an option.

In our case, that issue would apply, as one spouse is a resident of CA, a community property state. Therefore the non-resident spouse has CA source income, and filing a joint federal but separate CA returns is not an option.

So if you change the last words of your statement from "as a nonresident" to "separate CA but joint Federal returns" then you've got it correct.

--Peter

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84930 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 2:18 PM
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wtam wrote:

also, *big* point: when he says where the income is sourced is not just a matter of "we did the transactions through my wife's account'. if you put money into her brokerage account, in her name alone, and made a huge gain, when push comes to shove if a CA auditor wants some of that all he has to do is show some of your CA sourced wage $ went into her account (say, via check). Tax authorities are very adept at looking past 'technicality' to get at the economic basis or spirit of the transaction.

I write:
Now THAT does answer my question.

Bob78164 wrote


No. But it may boil down to the not-so-mere technicality of the original source of the funds in the account. If that source was separate property, it gets one treatment. If it was community property, it gets another. --Bob

I write:
And so does this.

So here's my next question. Since it's very difficult to accurately identify the source, can I divide the capital gains in the same ratio as our incomes? Will that be reasonable? Or should I just go ahead and include all of the gains as my income in CA return (it will be safest way, but definitely will not save me anything that I may be entitled to)?

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84931 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 2:24 PM
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I am assuming Turbotax does that all very efficiently.

I would not be so quick to make that assumption. It's been a difficult challenge to do correctly in every professional level software I've used. I would not assume that some consumer grade software makes it any easier. (Especially since I use one of the professional programs done by Intuit, who also does TT.)

Does it just boil down to mere technicality of what kind of account it is?

Absolutely not. The account can be titled any way you like. The issue is the source of the funds that went INTO the account.

If so, I might as well have carried out all transactions from my wife's individual account and we would have been able to save all the state income tax on those gains (FL does not have any state income tax), correct?

Again, no. If you earn money and send it into an account in her name, that remains community property income. So it would remain partially yours and subject to CA taxes.

There are some rather strict rules regarding community property. Once funds become community property, it is not easy to make them separate property. I do not know exactly how to accomplish this, or if it is even feasible to do so. I'd have to defer to a lawyer on this one, as it has little to do with taxes. Once the property is determined to be community or separate, then I can figure out how to tax it.

And you've got the further complication of one spouse being in a community property state - CA - and one in a state that does not use community property - FL.

In the end, I have less confidence in my first answer than I did when I typed it. I'm not sure if your wife's income is community property. I'm pretty sure yours is. This is one of the complications of unusual living arrangements like this. And it is not addressed very well in the tax codes or regulations.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84938 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 2:51 PM
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My only question is the section of the CA540 instructions that states that if the non-resident spouse has any CA-source income due to community property rules that spouse cannot file as a nonresident. [...]

So if you change the last words of your statement from "as a nonresident" to "separate CA but joint Federal returns" then you've got it correct.

That was my intent, my language was sloppy. The point being that for the specific set of facts under consideration, there is no way to avoid reporting the full capital gain to CA.

Ira

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84940 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 3:02 PM
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Since it's very difficult to accurately identify the source,

Why is it difficult to identify the source? If it's because the money that went into the account was commingled money from both spouses - perhaps it had run through several other accounts before - then it will almost certainlly be community income from CA's point of view.

can I divide the capital gains in the same ratio as our incomes? Will that be reasonable?

No. Your relative incomes for 2005 have nothing to do with the source of the funds that went into the account. It's either community income or separate income. There's no middle ground here.

If it's community income, it goes 1/2 to each spouse. If it's separate income, it goes to the spouse who owns it. Since you are in a community property state, it's pretty hard for you to have separate income. Not impossible, just hard.

Once again, the legal complexities of one spouse living in a community property state and one not are the overriding issues here. Once you get that sorted out, the tax treatment will become fairly obvious.

--Peter

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84942 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 3:11 PM
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The point being that for the specific set of facts under consideration, there is no way to avoid reporting the full capital gain to CA.

No, I disagree with this. Sort of.

As part of the non-resident tax calc, all income and deductions worldwide will need to be reported. Then the CA source income will need to be identified.

In this case, it is possible that our OP has a non-CA source capital gain. A simple tweaking of his fact pattern would make me state pretty confidently that the gain is NOT a CA source income item.

For example, if he could say that the funds in this particular account were an inheritance that his wife received, they would pretty clearly be her separate property. Then since she is a non-resident of CA, the capital gain would be non-CA source income.

--Peter

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84943 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 3:17 PM
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ptheland wrote:

If it's community income, it goes 1/2 to each spouse. If it's separate income, it goes to the spouse who owns it. Since you are in a community property state, it's pretty hard for you to have separate income. Not impossible, just hard.


I write

Ok. So basically our combined income will be considered "community", correct? Now, I am a little unclear about your above statement "If it's community income, it goes 1/2 to each spouse.". Does that mean if I have a cap gain of say $x for the year, I show half of it (my portion) on our CA return, i.e. $x/2? Or do I show all of it? I just want to get to the moral of the whole story here. Can I save anything at all or nothing?
Thanks again everyone for their insights.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84944 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 3:29 PM
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Ok. So basically our combined income will be considered "community", correct?

I don't know. That's the issue here, and probably one for the lawyers.

With one spouse in a community property state and one not, I don't know how to determine community property income.

Now, I am a little unclear about your above statement "If it's community income, it goes 1/2 to each spouse.". Does that mean if I have a cap gain of say $x for the year, I show half of it (my portion) on our CA return, i.e. $x/2? Or do I show all of it?

Well, all of it will go in the worldwide income column, and 1/2 will go in the CA source income column. From a practical standpoint, 1/2 if it is taxable to CA.


I just want to get to the moral of the whole story here. Can I save anything at all or nothing?

Yes, a savings is definitely possible. There are three possibilities.
-Your separate income. Fully taxable to CA.
-Community income. 1/2 taxable to CA.
-Your wife's separate income. Not taxable to CA.

--Peter

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84948 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 5:11 PM
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I think it's much clearer to me now than when I made the initial post in this thread.

Peter said:

I'm not sure if your wife's income is community property. I'm pretty sure yours is. This is one of the complications of unusual living arrangements like this. And it is not addressed very well in the tax codes or regulations.

And later Peter added:
Yes, a savings is definitely possible. There are three possibilities.
-Your separate income. Fully taxable to CA.
-Community income. 1/2 taxable to CA.
-Your wife's separate income. Not taxable to CA.

I say:

Here's what I understand so far:
1. My income is "community" property (since it was earned solely in CA). As such, no part of my income can be termed "separate", including gains sourced from my income.

2. My wife's income is NOT community property since it was earned solely by her in a separate state (FL) (Peter is not sure about this but that is not very important for me to be answered right now anyway. I am more interested if ensuring whether my income is community or separate).

3. Income such as Interest on savings account gains, Cap Gains from stock sales on arising out of CA sourced (my income) etc. will be community property, while that earned from non-CA sources will NOT be "community".

4. All income that is deteremined to be "community" will be "1/2 taxable to CA" as Peter mentioned.


Are these inferences accurate? Sorry to be seemingly beating this do death, but I promise I won't drag this much longer :).

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84949 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 5:31 PM
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The point being that for the specific set of facts under consideration, there is no way to avoid reporting the full capital gain to CA.

No, I disagree with this. Sort of.

As part of the non-resident tax calc, all income and deductions worldwide will need to be reported. Then the CA source income will need to be identified.

In this case, it is possible that our OP has a non-CA source capital gain. A simple tweaking of his fact pattern would make me state pretty confidently that the gain is NOT a CA source income item.

For example, if he could say that the funds in this particular account were an inheritance that his wife received, they would pretty clearly be her separate property. Then since she is a non-resident of CA, the capital gain would be non-CA source income.


I don't disagree with your analysis. I just don't read the words of the original post to indicate that this is a possible fact pattern.

Ira



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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84966 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 7:52 PM
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damastr writes (in part):

Since it's very difficult to accurately identify the source, can I divide the capital gains in the same ratio as our incomes? Will that be reasonable?

I reply:

That can't be right, because as far as California is concerned, both your income and your spouse's income are community property. The only likely sources of separate income are (1) property one of you brought into the marriage, (2) gifts, and (3) inheritances. Anything else is probably community property. --Bob

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84970 of 120799
Subject: Re: Captial Gains for State Return Date: 3/13/2006 9:01 PM
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damastr writes (in part):

1. My income is "community" property (since it was earned solely in CA). As such, no part of my income can be termed "separate", including gains sourced from my income.

2. My wife's income is NOT community property since it was earned solely by her in a separate state (FL).


I reply:

No. As far as California is concerned, the earned income of both spouses is community property. If I remember the Bar exam correctly (this is not my area of the law), income that would be community property if earned in California is called "quasi-community property," but my guess is that for tax purposes quasi-community property is treated the same as community property. --Bob

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Author: damastr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84981 of 120799
Subject: Re: Captial Gains for State Return Date: 3/14/2006 1:54 AM
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Bob said:
No. As far as California is concerned, the earned income of both spouses is community property. If I remember the Bar exam correctly (this is not my area of the law), income that would be community property if earned in California is called "quasi-community property," but my guess is that for tax purposes quasi-community property is treated the same as community property. --Bob


I say:

I disagree. Check out link below. It clearly states that income earned while domiciled in a separate state is "separate property" and not "community". And my wife's income was earned in FL, which is NOT a community property state. So her income must be treated as "separate".

http://www.taxes.ca.gov/newind.html#OtherTaxCredits

-------------------------
Do You Know How Community Property Laws Affect Your Taxes?

California is a community property state. This means that all property married couples acquire while domiciled in California is community property. Each spouse owns an equal share of all community property.

Separate property is all property owned separately by the husband or wife before marriage. It includes all property acquired separately after marriage, such as gifts or inheritances. Separate property also includes money earned while domiciled in a separate property state. All property declared separate property in a valid pre- or post-nuptial agreement is also separate property.

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