The importance of California nonresident clients' worldwide income.

• Position: FTB news

For tax year's beginning on or after Jan. 1, 2002, the first step in calculating a nonresident or part year resident's California tax is to calculate the taxpayer's effective tax rate as if the taxpayer were a California resident. If the taxpayer fails to report this income a statutory adjustment will be made to the 540NR return. These adjustments are usually made based upon information received from the IRS regarding the adjusted gross income reported on the 1040.

Why does California calculate the tax this way? Both the IRS and California assess tax based on tax brackets, which are the divisions at which tax rates change in a progressive tax system. Progressive tax systems attempt to reduce the "tax incidence" of people with a lower "ability-to-pay," as they shift the incidence increasingly to those with a higher...