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Working in 2 different states: does the California income tax rate only consider the money earned in California, or anywhere?

Personal Finance & Money Asked on March 6, 2021

For example, let’s take Bob who:

  • worked from January to March in California, where he earned 30kUSD (W2 income and Bob was a California resident),
  • worked for the rest of the year in the state of Washington, where he earned 70kUSD (W2 income and Bob was a Seattle resident).

Which income tax rate should Bob use when paying taxes to California? Does he only pay state taxes on 30kUSD toward California? Or does the fact that he earned 70kUSD on the same year in some other state impact his California income tax rate?

One Answer

California, like most states, will consider the money you earned anywhere. Your California state income tax is calculated as (California income / total income) x tax calculated on total income. If it were instead simply tax calculated on California income, you could hypothetically make a little money in nearly every state, and owe practically nothing due to standard deductions and other things, while still having a fairly high total income.

You can see this in action on CA Form 540NR (for non-residents and part-year residents). Line 19 is your total taxable income. Line 31 calculates the tax on that. Line 35 is your California taxable income. Line 36 is your California taxable income divided by your total taxable income. Line 37 is your tax multiplied by your fraction of income from California. California has an exemption credit that is also prorated in a similar manner.

So in your example, Bob will be taxed 30% of the tax calculated on $100k. This will be more than if he had only made the $30k in California, but less than if he had made all $100k in California. As I mentioned earlier, nearly every state calculates income tax in this manner, though New Jersey is one exception that I'm aware of.

EDIT: As mhoran_psprep alluded to, this assumes that Bob truly becomes a non-resident of California. If he is just relocating to Washington temporarily, California will still consider him a resident, and he will owe California tax on all $100k. See the California residency guidelines.

Correct answer by Craig W on March 6, 2021

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