How are part-year California resident income taxes calculated?

Question

For the sake of simplicity, let's suppose that a person's total yearly income is $100,000, all as W2 wages from the same employer. That person lived in one state from January 1 - June 30, and then moved to California on July 1, and lived there for the remainder of the year.

A quick reading of the official California tax site suggests that the CA income tax would be based on $50,000 (i.e. the amount of yearly income the person earned while a resident of the state, which was for exactly 1/2 of the year).

But then I found this site, which suggests something very different (that the amount of tax is based on the $100,000 yearly income, but simply divided by 2 due to the half-year residency).

So which one is correct? Do the progressive brackets "reset" when one takes up residency?

Answer 1

Progressive tax brackets do not reset when you switch residency in most States.

In California, specifically, the tax is calculate on the total income and then the portion of the income that is attributed to California is calculated. Out of the total tax you calculated (see instructions for line 31), you pay the prorated amount based on the rate of the income attributed to California out of the total income (see instructions for line 37).

The tax rates are in the 540NR booklet, page 30 and on.

The income attributed to California is income earned in California, or worldwide income while CA resident. So you cannot just divide your total income by 2 because you lived half a year elsewhere, you need to check each item of income, and see to which State (or States) it should be attributed to.

If you earned $100K a year, moved to CA on July 1st, and out of the 100K you earned 90K in August - you cannot say that only half of the income is attributed to California just because of the half-year residency.

Answer 2

What you describe (non-resetting of the brackets) does result in the same amount of tax paid if the two states have the same tax rates and brackets. They just split the taxes based on their share of the total income. If they don't have the same rates and brackets you may wish that you could count more income with one of the states.

If as you proposed they reset the brackets when you move, you could avoid most of the state taxes. You would be able to take all the standard deductions for both states, and keep your income in the lowest bracket; then start over again when you move.

A quick look at the California short form version for part year residents show that you pay taxes and are allowed to use the standard deduction based on the percentage of your total federal income that can be attributed to California. This would seem the fairest way to split the taxes between the states.

Answer 3

Your second interpretation is right. In California (and many other states), the tax is calculated based on your worldwide income for the entire year, and then multiplied by the fraction of income that is from California. In other words, you still only pay California tax on California income, but your effective tax rate is determined by your worldwide income the whole year.

If you think about it, this is the fair way to tax in a progressive tax system. Consider two people who both make $100K a year, one makes all his income in one state, the other earns $10K from each of 10 states (assume they all have the same tax rates). If each state only taxed the second person like a person who made $10K the whole year, then he would pay very little or no tax, because $10K is under the standard deduction and exemption amounts for most states, and even if there is a small part that is taxable, it would be under the lowest bracket. On the other hand, the first person would be taxed as a person who made $100K a year (lots of tax). Would that be fair?