Arizona Preparers Please Help!

[Tax Prep by Deb]

I have a client who moved out of California in 2014.  Lived the entire year as a resident in Arizona.  Was hoping to be completely done with California but received a W2 for some back wages when the City of Stockton filed for bankruptcy.  He also short sold his California home and has 32,000 in cancelled debt that can be excluded from Federal because it was for his primary residence, the sale of which became final in 2014, Cannot be excluded from California because they are not going along with IRS on this (all monies from the loans were used to purchase and improve home)

I am filing his California return as a non resident and will be paying taxes on the California source income including the cancelled debt.

I am filing his Arizona return as a full time residence.  My question is what do I do with the Cancelled debt for California based property?  Do I include this in his Arizona income?  For federal purposes I will be filing the 982, and excluding the cancelled debt.

Hope I'm not confusing anyone, I am sooooooo tired at this point and would really like to get this one finished.

Thanks for any input.

[fredazcpa]

Arizona starts at Federal AGI and makes add backs and subtractions, their is no add back or adjustment for the cancelled debt.  Arizona taxes all residents income regardless of where earned, then their may or may not be a credit between the states, if the income is taxed in both states.  With CA, it is CA that gives the credit if my memory serves me right.  hope this helps.

 

[BHoffman]

See Arizona form 309 to claim a credit for taxes paid to another state. 

[joanmcq]

CA has conformed on the cancellation of debt for primary residence. So it shouldn't be taxable. 

[LouD]

17 hours ago, BHoffman said:

See Arizona form 309 to claim a credit for taxes paid to another state. 

CA is one of the exceptions for claiming the credit for taxes in other states - so you have to take the credit for any AZ taxes paid on the CA return.

[Tax Prep by Deb]

8 hours ago, joanmcq said:

CA has conformed on the cancellation of debt for primary residence. So it shouldn't be taxable. 

Can you point me to your source.  Everything I checked said they did up to a certain year, but have not gone along with the more recent extensions.  Maybe I missed something.

[BHoffman]

11 hours ago, LouD said:

CA is one of the exceptions for claiming the credit for taxes in other states - so you have to take the credit for any AZ taxes paid on the CA return.

Yes it is!  See CA Schedule S.

I found this on the CA FTB website:  https://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml

[Tax Prep by Deb]

2 hours ago, BHoffman said:

Yes it is!  See CA Schedule S.

I found this on the CA FTB website:  https://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml

It says that from 2014 on they do not conform to Federal.  Prior to that they did.  So again everything I see says we cannot exclude the cancelled debt of his primary residence.  Unless I'm  missing something.

[fredazcpa]

Since Arizona conforms to Federal on the Cancelled debt for a personal residence and it appears the CA  does not, then the credit for other state taxes on the CA schedule S will only be on the other CA income he has (not the Cancelled debt), that was also taxed in Arizona.  Is there any way you can justify part year in both states?  When did they/he leave CA? This may help with getting the returns for the state correct

 

[joanmcq]

CA has pending legislation for retroactive conformity. I thought it has passed. My bad.