Exploring ways to reduce California tax for spouse return

potax · Post by **potax** » Thu Apr 09, 2015 2:30 pm

Hi,
First a bit of background:
We have moved to California from Canada in March 2014. My wife had some Maternity and employment income after March 2014 which we need to report to IRS. She is filing Married Separately and myself is doing Married Separately as well since we don't want to report the whole year income. We have moving expenses and paid real estate taxes in 2014.

The main question:
On her return when we put about 18$k of NR income and claim foreign tax credit of about 3500$, it turns out that she did not owe anything to IRS, BUT owes about 200$ to California. Is there any ways to transfer some costs/credit/expenses from myself to her to make this CA only amount zero? ... I have played with real estate taxes but the problem is in order to make 200$ zero on her return, I would loose about a 1000$ on my own return.

Thanks a lot,
Paul

nelsona · Post by **nelsona** » Thu Apr 09, 2015 2:44 pm

Unfortunately, california does not accept forein tax for credit, so you lose on that score.
I don't look at State tax. too variable. But do remember that interal RRSP is taxable in california.

But, really, have you looked at doing MFJ for federal? because you are being quite highly taxed on your US income by not doing so.

The Cdn income should be handled "cheaply" by a combination of 2555 and/or 1116. Plus you get the standard deduction, if that helps.

I rarely see someone moving so early in the year not benefitting from filing MFJ wordwide.

Since you are filing 1040, you don't get away from having to do all the other reporting that 1040 full year filers, so I would be looking at this.

may I ask what income you had in early 2014 that makes you believe that MFJ own't work for you?

potax · Post by **potax** » Thu Apr 09, 2015 7:16 pm

Hi Nelsona,
Thanks a lot for looking at my post and providing feedback.

If I do joint, I will loose 600$. here is why;
- my canadian income after 2555 exclusion is about 17k and I get 1300$ foreign tax credit.
- considering the exemption that I get for my wife for joint filing, the line 43 (taxable income) of joint return will be 13k higher than that of separate filing.
- line 44 (calculated tax) of separate filing is about 2000$ lower than line 44 of joint. So taking to account the foreign tax credit I will loose 600$ if I go joint.

I guess one of the reasons for this is that my taxable income in separate filing case is just a few ks into 25% tax bracket due to a lot of itemize deductions that I had including real estate related deductions and moving costs. and that is why lower tax brackets of joint filing does not help me that much.

All being said I would be more than happy to be reminded that I am wrong and I have made a mistake! :)

nelsona · Post by **nelsona** » Thu Apr 09, 2015 7:57 pm

Moving expenses are not a deduction, they are a page 1 adjustment.
Are you sure you are doing this right?

I agree that you Might be, on the edge, but somehow I doubt it. the bracket for MFS is MUCH higher than MFJ. You may be losing out on some deduction by MFS too. Are you correctly splitting the deductions related to your home between you.

But if you are using software (correctly), then go for it.

nelsona · Post by **nelsona** » Thu Apr 09, 2015 7:57 pm

... and did you get myt point that her Govt wages are not even reportable?

potax · Post by **potax** » Thu Apr 09, 2015 10:34 pm

Hi Nelsona,
I really appreciate you reading my posts and providing insight. I am hoping that I am messing up something here and therefore getting wrong numbers!

1) moving expenses as deduction:
I apologize for my sloppy wording but we can blame it on TaxAct! I just double checked my return; it is reported on Form 3903 and then as you pointed out it correctly appears on Line 26 of 1040.

2) MFJ and MFS brackets:
Absolutely right. however, my MFS taxable income (which does not include my canadian income) is just 44k. This means that only 7k of that falls into 25% MFS bracket instead of 15% bracket of MFJ. Also if I do MFJ and claim my canadian income, then my taxable income goes up to 58k even after 2555. BTW, all these calculations only consider my own income and I just wanted to see how my taxes are affected by MFJ and MFS.

3) loosing deductions for MFS:
I am using itemized deduction rather than the standard one. so by doing MFJ the only thing that I can claim is 3950$ extra for my wife. Is there anything else that I can deduct which I could not for MFS? I am also claiming all real estate related expenses by myself for both MFS and MFJ.

4) "Govt wages not reportable":
This can be the most important one for me. My assumption was that the portion of the maternity leave that she received from the Canadian/QC government AFTER we moved to California (which we paid 25% flat to canada), is taxable by both IRS and California. Am I wrong? how is this income different from other canadian incomes that you receive while in US?

Thanks a lot,
Paul

nelsona · Post by **nelsona** » Thu Apr 09, 2015 11:04 pm

4. Only Govt wages would not be reportable, not other types of income. Her T4 would say whether some of this income was considered wages. Cali might have different rule.

as long as you are using s/w and you have run all the scenarios, including no 2555 and 1116 only.
Nothing in your post sounds wrong.