State tax home is critical...
Subject: State tax question
Hello KMK,Tax Guru is a neat website. Compliments!I am an Illinois accountant with a client with an Illinois S-corporation, but who lives in California. With the lower Illinois individual income tax rate, I would like to have Illinois tax the S-corporation income, and leave it off of the California individual return. Do you know how to do this in the California return?If you do "out-sourced" tax research for others, please let's discuss your charges for the service. Thoughtful research is appreciated.
It will all depend on which state is your client's official tax home. If it's California, he will have to report all income from all sources (including the IL 1120S) on his Calif. 540. Of course, he will also need to file a nonresident IL return. He will be able to claim a credit against his CA taxes for part or all of the IL tax on that income. As you know, the net effect of the out of state tax credit is that he ends up paying the higher of the two states' taxes.
If your client can establish his official tax home in IL or another state, he can file a 540-NR as a CA part year or nonresident and then only allocate his CA source income to that state. Many people use tax free states, such as Washington, Nevada, Texas, or Florida, as their official tax home for just this reason.
I hope this helps. I'm still not caught up enough with the workload with my current paying clients to be able to accept any new ones. General questions that should be of interest to my blog readers are always welcome however.
Thank you for your prompt reply, and good advice.