California Part year resident wages

[willatbird]

Client moved to California September 1st from the Netherlands. Her W2 from the US is different for Federal and California (it shouldn't be, but their payroll department screwed up and won't own up to it).

When I use the wage allocation on line 1 it shows the correct amount of CA source income but then "apportions" the income so that she's paying a higher tax than she would have on just the CA income earned. It works if I use the "State Wages, if different" line, but I keep getting Critical Diagnostics, so I'm second guessing myself.

She should only be paying CA taxes on wages earned while she lived in California, right?

[qbteachmt]

"She should only be paying CA taxes on wages earned while she lived in California, right?"

Most times, there is tax on all income, and then a credit back if there also was tax paid on that same income to another entity. You might start here:

https://www.ftb.ca.gov/file/personal/residency-status/part-year-and-nonresident.html

[BobKamman]

Why do you think the payroll department screwed up?  I often see state W-2s that split out the total federal amount, by state.  She moved to California from the Netherlands, but where was she a resident before she moved?  Is she a newly-arrived immigrant, or was she a US resident before going there, and did she maintain her US residence?

States have two methods of taxing part-year residents. 

Method 1:  Just pay tax on what you earned here, it doesn't matter what you earned elsewhere.

Method 2:  Figure the tax on your entire annual income, regardless of where it was earned.  Then apply to that total tax, the percentage of income that was earned here.  

The second method gets part-year residents into the higher state tax brackets, and so is popular with states like California and New York.  

[sjrcpa]

And CA taxes some things that the feds don't. For example - HSA contributions I think.

[willatbird]

She earned and vested RSUs in the Netherlands. Same company, different entity. The US entity reported her Netherlands RSUs on her W2. That is correct after she moved back, but not while she was a bona fide resident of the Netherlands. I don't want to get into a discussion about RSUs. I've already figured that one out.

[willatbird]

From your link:

"Part-year resident

If you lived inside or outside of California during the tax year, you may be a part-year resident.

As a part-year resident, you pay tax on:

• All worldwide income received while a California resident
• Income from California sources while you were a nonresident"

The only income earned while in California is the California portion of the W2. The additional income was earned while she lived in the Netherlands. 

[qbteachmt]

"The additional income was earned while she lived in the Netherlands."

As in: "Income from California sources while you were a nonresident" because you told us "Same company, different entity."

[BobKamman]

A synonym for "vicious" is "California Franchise Tax Board."  If you and your client are not already good friends, I predict you will be by the time the statute on this return expires.  

[willatbird]

No, Income from the Netherlands sources. Foreign branch of a US company and she was a bona fide resident of the Netherlands. Should not have been on the US W2. US and CA should be the same but the W2 is wrong. The Netherlands income is being reported on the 2555. After she moved back the income is correctly reported on both the Netherlands and the US W2 (and included in the CA W2 income).

[willatbird]

LOL, isn't that the truth! She's my niece and I adore her. That won't change.