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I'm a Tax Preparer in California with client and have a

Hello, I'm a Tax Preparer...
Hello, I'm a Tax Preparer in California with client and have a question regarding State Taxation. Both Taxpayer and Spouse are Active Military. They currently live in California and purchased a House in California 2017
Husband claims Home of Record in Arizona and his W2 shows Arizona as State Wages
Wife claims Home of Record in Philippines and her W2 shows XX
Are they allowed to avoid paying California Taxes?
If yes, how to show it on their California return?
Arizona -- does there have to be an Arizona return for the Husband?
If yes, is it Tax Free because he is Active Military?
If yes, how to show it on Arizona return?
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Answered in 7 minutes by:
3/21/2018
Carter McBride
Carter McBride, Financial Advisor
Category: Finance
Satisfied Customers: 1,220
Experience: Adjunct Professor
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Hey! I'm Carter, I'm a CPA and can help you out.

The short answer is no. California is really particular about this but luckily, California has a great resource for it.

If you go here: https://www.ftb.ca.gov/forms/2017/17_1032.pdf#page=9

California provides a list of all the different military service person and spouse combinations you can have and the proper filing requirements along with the forms to fill out.

The military person will definitely be subject to California tax.

Let me know if you need anything else. If not, please leave a rating. Thanks!

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Customer reply replied 3 months ago
How about Arizona?
His W2 shows Arizona State Wages & ZERO Arizona State Withholding?

Arizona tax is not required to be withheld from compensation received for active duty military service as a member of the U.S Armed Forces. since that is not taxable income in Arizona.

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Customer reply replied 3 months ago
is an Arizona NR return required to be filed?
If yes, does the Arizona exclusion apply even if he is Non Resident of Arizona?
If yes, how do you show the exclusion?

It would not be required to be filed unless he had other income.

He is still considered a resident of Arizona. Being stationed in the military does not make him lose his residency.

Here's the Arizona Pub on military members:

https://www.azdor.gov/Portals/0/Brochure/704.pdf

Q7. I was an Arizona resident when I joined the service and am now stationed outside of Arizona. Will I continue to be an Arizona resident for income tax purposes? Yes. For Arizona purposes, an individual who was an Arizona resident when entering the service is considered to be an Arizona resident regardless of where the individual is stationed. That individual would continue to be an Arizona resident until a change of residence is established.

You would have to go through the list of things under Question 8 with the client to see if he did in fact change his residency.

If he did have other income and does have to file, then you include the active military income and then it will be a subtraction on the Arizona return as well so it nets to $0.

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Customer reply replied 3 months ago
Carter:
I have read through the FTB Pub 1032.
When I read your response that the bot***** *****ne is no. The military person will definitely be subject to California tax.I'm confused about that compared to what I read on page 5, chapter C.
Active Duty Military -- Generally, for tax purposes, you are considered a resident of the state from which you entered the military. (Neither Husband or Wife entered the military in California)Then in Chapter F -- In general, California taxes all of the income ou received while you are a resident of California and all of the income you received from CA sources while you are a nonresident. NEXT PARAGRAPH --Under the federal SCRA, military servicemember who are not domicilied in Califonria are NOT TAXED by California on pay received for military services performed in CaliforniaHow does the Pub 1032 which I just pointed out reconcile with your statements?Please adviseDon

Your couple will fall under 10 in the California pub. He's a non-domiciled person who is domiciled in a community property state (Arizona). So, they won't get hit with the tax, but they still need to make the appropriate filings is what I was trying to state. They are still required to pay tax on California non-military sourced income.

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Customer reply replied 3 months ago
does that mean their Military Pay is excludible / non taxable to California?
If yes, Do we file 540NR and where do you pull it out of the California return?
file the non-resident return. Report the income, the report the military pay as a subtraction.
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Customer reply replied 3 months ago
Hello Carter. I called the California help for Military phone number and they told me that there is NO need to file a California tax return based on what I described. They said the basic factor that made that decision was that both taxpayer and spouse were active military and their PSC was California, but their Home of Record was NOT California.Does this sound logical to you?

That would work as long as there is absolutely no other income. I'm more cautious and would file to at least get a statute of limitations running just in case.

Carter McBride
Carter McBride, Financial Advisor
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Satisfied Customers: 1,220
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