The taxpayers permanently moved from CA to a foreign country with no plans to return to the US or CA. The taxpayer is a self-employed consultant and performs all personal services from their home in the foreign country. Since the US sources income primarily based on where the services are performed (foreign country), the taxpayers will likely qualify for the foreign earned income exclusion based on the physical presence test. Several of the taxpayer’s clients are CA residents and with CA’s sourcing rules, that income will be CA sourced (personal services with benefit in CA). Can you have income that is not US sourced and excluded via the foreign earned income exclusion for US tax purposes while that same income is also considered CA sourced income based on CA’s sourcing rules (services performed outside of US for CA clients)? How do you handle the two different definitions of sourced income?
Yes. CA doesn’t conform to the foreign income exclusion and for CA purposes, the taxpayer is a nonresident and would be taxed on the apportioned income based on services to his California customers. It will work the same if he is in a foreign country as it would if he were in another state.