California taxes a part-year resident’s California income at the rate of the whole year’s income. Form 540NR is not a tax on California income alone. It is a tax on worldwide income, cut down by a ratio.
That is the piece firms get wrong. Software fills in the form, but the allocation behind column E is manual.
The method, in the FTB’s words
The backbone for this return is FTB Publication 1100. (It is the Franchise Tax Board’s guide to nonresidents and people who change residency.)
The rule reads: “determine your California tax by multiplying your California taxable income by an effective tax rate.” The effective rate is the tax on all income “as if you were a California resident,” divided by that income.
The statute is Revenue and Taxation Code Section 17041(b). The tax is the part-year taxable income times a rate. The rate is the tax on the entire taxable income. That tax is figured “as if the nonresident or part-year resident were a resident of this state.”
Section 17015.5 defines the taxpayer. A part-year resident is a resident “during a portion of the taxable year” and a nonresident during another portion.
What the ratio does to the rate
Publication 1100’s Example 1 shows the arithmetic. A single client is a Florida resident until March 31 and moves to California on April 1. Florida wages are $15,000 with $1,000 of interest; California wages are $65,000 with $3,000 of interest.
California AGI is $68,000. Total AGI is $84,000. (AGI is adjusted gross income.) Itemized deductions of $24,000 are cut to $19,428 by the ratio of the two, .8095.
Total taxable income is $60,000 and the tax on it is $2,260. Divide one by the other and the rate is .0377. California taxable income of $48,572 times .0377 is $1,831.
The Florida income never entered California AGI. It still set the rate, because the rate is the whole year’s tax over the whole year’s income.
Where it lives on the forms
Schedule CA (540NR) has five columns. Columns A to D rebuild federal income under California law for the whole year. Column E is the California amount.
The 2025 instructions define column E in one sentence. “Enter all income from all sources while a resident of California and income from California sources while a nonresident.” Part-year residents fill it from the Part-Year Resident Worksheet.
Part IV of the schedule divides column E by column D for the deduction ratio, carried “to four places.” Form 540NR line 36 then divides the tax on total taxable income by total taxable income. Line 37 multiplies California taxable income by that rate.
Allocated by period, or by source
Publication 1031 sets the rule for each kind of income. (It is the FTB’s residency guide.) Some items follow the residency period, others their source.
Wages. “Wages and salaries have a source where the services are performed.” A part-year resident includes all wages earned while a resident, wherever the work was done. For the nonresident period, only wages for California work count.
Interest and dividends. They “generally have a source where you are a resident.” The resident months are in and the nonresident months are out. The exception is an account used in a California trade or business, or pledged for one.
Capital gains. For stocks and bonds, the source is “where you are a resident at the time of the sale.” The sale date decides it, not the holding period. Real estate is the opposite: the gain has a source where the property sits.
Pensions. “Nonresidents of California are not taxed on pensions received after December 31, 1995.” That date comes from 4 U.S.C. §114, which bars a state from taxing a nonresident’s retirement income. For the resident period, Schedule CA takes the pension “received while a resident of California.”
Pay that straddles the move
The move-out trap is pay for California work that arrives after the client has left. Publication 1100’s Example 10 is a retiree who moved to Nevada on January 1. The final $4,000 paycheck arrived on January 10, and California taxes it, because the work was done in California.
Publication 1031 states the test. “Neither the location of the employer, where the payment is issued, nor your location when you receive payment affect the source of this income.” That is the sentence to apply to a bonus paid after the move.
The move-in trap is the reverse. In Example 12 a client moves from New York on May 1. The last New York paycheck arrives on May 8. California taxes it, because she was a resident when she received it. Schedule S gives a credit for the New York tax.
Deferred compensation splits by plan type. Publication 1100: California “does not tax the IRA distributions, qualified pension, profit sharing, and stock bonus plans of a nonresident.” But Publication 1031 keeps California-source lump sums “from most nonqualified plans” taxable to a nonresident.
Equity compensation has its own rules, covered in how California taxes equity after you leave.
A spouse who moved on a different date
California is a community property state. (Community property means each spouse owns half of what either earns while domiciled there.) Publication 1031 puts the rule in one line. “The domicile of the spouse/RDP earning the income determines the division of income between spouses/RDPs when separate returns are filed.”
Its safe-harbor example shows the effect. One spouse is a nonresident working abroad. The other teaches in San Diego. On a joint Form 540NR, half of the nonresident’s $80,000 lands in column E.
The footnote explains why: “because California is a community property state and your spouse/RDP is a resident of California.” So a spouse who moves on a different date can pull half of the client’s nonresident wages into California. Domicile has to be fixed for each spouse, for each period, before the allocation starts.
The two errors we see most
The first is treating the year as a nonresident return. Column E gets California-source income only, for all twelve months. The worldwide income from the resident months is left out.
Column B is not for income “earned while a nonresident of California or from sources outside of California.” That income belongs in columns A to D.
The second is applying the rate to California income only. The preparer looks up the tax on California taxable income and stops. In Example 1 that skips the .0377 rate, which came from $60,000 of total income, not $48,572.
Both errors come from the same instinct: that California should only see California income.
What this means for your firm
A part-year return is two returns and a ratio. The resident months are a Form 540. The nonresident months are a sourcing exercise. The ratio ties them together and sets the rate.
Column E is the manual part. Someone has to date every item, source every item, and fix domicile for each spouse. We have written about the same kind of work in the multi-state allocation article. The client-facing side is in our state tax guide.
We prepare these for firms. 5,300+ tax returns filed in the last 4 seasons. One enrolled agent prepares the return and a second reviews it, column E against the dates in the file.
What comes back is the Form 540NR with the worksheet completed and a note on each allocated item. Your firm stays preparer of record. We never sign a return or e-file.
We work under ISO/IEC 27001:2022 certification. How we work with firms is at for expat tax firms. If there are a few of these in the pile, start with five returns. Pricing is on the pricing page.