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TP lives in AZ & has a business in AZ, sold property in CA. Do I need to report all income on both state returns?

csanchez
Level 3

Client lives in AZ, has W2 wages & Sch C Business (loss). Sold 2nd home in CA & will pay capital gains tax. When completing the state returns, is the CA capital gains reported to AZ and on CA return is the AZ Sch C business reported to CA? Seems like there should be adjustments for the States to not include all income.

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Just-Lisa-Now-
Level 15
Level 15

AZ will tax all income.   Only the home sale will be allocated to CA. 

Use the Non resident state allocation worksheet at the bottom of the federal information worksheet.

AZ and CA are reverse credit states, so CA (the non resident state) should give credit for taxes paid to AZ on that home sale income since it will be taxed in both states.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

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Terry53029
Level 12
Level 12

Only resident state is all income reported. Nonresident state only report income earned in that state only.

Just-Lisa-Now-
Level 15
Level 15

AZ will tax all income.   Only the home sale will be allocated to CA. 

Use the Non resident state allocation worksheet at the bottom of the federal information worksheet.

AZ and CA are reverse credit states, so CA (the non resident state) should give credit for taxes paid to AZ on that home sale income since it will be taxed in both states.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

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csanchez
Level 3

For CA, will all income be listed on Sch CA (540 NR) & then allocated?

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Just-Lisa-Now-
Level 15
Level 15

The CA 540NR will start with the Fed AGI, then it uses the % of CA income to compute the tax..  ProSeries does a pretty good job with this.  I have several clients that live in AZ with CA rental properties.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
BobKamman
Level 15

I suppose one of these days I'll have to deal with one of these situations.  The problem will be, if the asset was purchased after 2011, only 75% of the gain is taxable by Arizona.  So will California give you credit for the tax paid on only 75% of the gain, and then require all the tax on the other 25%?  Franchise Tax Board has enough staff to do a project on this, I bet.  

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sjrcpa
Level 15

Yes. These credits are calculated on the "taxable income in the other state", not gross income in the other state.


ex-AllStar