Schedule CA 540NR: Line-by-Line Instructions

Schedule CA (540NR) is a California tax form that reconciles the income and adjustments you reported on your federal tax return with what is allowable under California law. Its primary function is to convert your Federal Adjusted Gross Income (AGI) into California AGI. This is a necessary step for individuals who are either nonresidents with income from California sources or were residents of the state for only part of the year. The form identifies the differences between federal and state tax rules to ensure you accurately calculate your taxable income for California.

Who Must File Schedule CA (540NR)

Filing Schedule CA (540NR) is a requirement for nonresidents and part-year residents who have differences between their federal and California income. A nonresident is someone who is not a California resident and does not have a permanent home in the state but has income from California sources. For instance, an individual living in a neighboring state but commuting to a job in California is a nonresident who must report their California-based wages.

A part-year resident is an individual who moved into or out of California during the tax year. If you lived in another state and relocated to California in July, you would be considered a part-year resident. You are taxed on all income received while you were a resident, plus any income from California sources during the period you were a nonresident.

The schedule is necessary because California’s tax laws on what constitutes taxable income can differ from federal regulations. These discrepancies necessitate the use of Schedule CA (540NR) to adjust your federal AGI accordingly. The form is specifically for those filing Form 540NR, the California Nonresident or Part-Year Resident Income Tax Return. If your income and adjustments are identical under both federal and California law, you may not need to file this schedule.

Information Needed to Complete Schedule CA (540NR)

Before beginning Schedule CA (540NR), gathering your financial documents is an important step. The foundational document you will need is your completed federal income tax return, such as Form 1040, as it provides the starting figures for income and adjustments.

You will need all Forms W-2, which report your annual wages and the income taxes withheld. These are important for identifying wages earned specifically from California-based employment. Similarly, gather all Forms 1099-INT for interest income and 1099-DIV for dividend income, as you must identify the source of these payments.

If you received a state income tax refund, you will need the corresponding Form 1099-G. Information on any unemployment compensation received is also needed, as this income is treated differently by California. Your Social Security benefits statement, Form SSA-1099, is another document to have on hand for a similar reason.

For those with more complex finances, other records are required. If you made contributions to a Health Savings Account (HSA), you will need those details. Records of capital gains and losses are also necessary, with attention paid to the source of the gain or loss. Finally, if you have business income, you must have statements that delineate the income and expenses connected to activities within California.

Completing the Schedule CA (540NR) Line-by-Line

Completing Schedule CA (540NR) involves transferring and adjusting figures from your federal return. The form is structured to guide you through calculating California-specific income by applying state-mandated additions and subtractions to your federal amounts. The schedule is divided into columns: Column A reflects federal return figures, Columns B and C are for subtractions and additions, Column D is for total amounts after adjustments, and Column E is for your California-source income.

Part I – Federal Adjustments

Part I of the schedule begins by capturing your residency information. You will indicate whether you were a nonresident or part-year resident and provide the dates you moved into or out of California. Following the residency questions, you will begin entering the income figures directly from your federal Form 1040. You will transcribe amounts for taxable interest, ordinary dividends, and other types of income exactly as they appear on your federal form into Column A of the schedule.

Part II – California Adjustments – Additions

Part II is where you will report income that is not taxed at the federal level but is taxable by California, or deductions allowed federally but not by the state. These are known as “additions” because they increase your California adjusted gross income. A prominent addition is the state and local income tax deduction you may have claimed on your federal Schedule A. Since California does not permit a deduction for state income taxes, you must add this amount back to your income.

Another common addition relates to interest earned from non-California municipal bonds. While interest from municipal bonds is often tax-free at the federal level, California only extends this benefit to bonds issued by California state and local governments. If you have interest income from bonds issued by another state, you must report that interest as an addition on your Schedule CA (540NR).

Other additions can include differences in depreciation methods for business assets or adjustments related to Health Savings Accounts (HSAs). California does not conform to all federal depreciation rules, which may require an adjustment. Furthermore, deductions for HSA contributions allowed on your federal return are not permitted by California, necessitating an addition to your state income.

Part III – California Adjustments – Subtractions

Part III of the schedule allows you to subtract income that was taxed on your federal return but is exempt under California law. These “subtractions” will lower your California adjusted gross income. One of the most frequent subtractions is for a state income tax refund. If you included a state tax refund as taxable income on your federal Form 1040, you can subtract this amount on your California return.

Unemployment compensation is another significant subtraction. While the federal government taxes unemployment benefits, California provides a full exemption for this type of income. You will enter the total amount of unemployment benefits reported on your federal return as a subtraction. Similarly, Social Security benefits are not taxed by California, and the taxable portion from your federal return should be entered as a subtraction.

Certain other items may also qualify as subtractions. For example, California allows for a subtraction for interest earned from U.S. Treasury obligations, such as Treasury bonds and notes, which is taxable at the federal level. If you moved into California, you might also be able to subtract income that was earned from sources outside of California while you were a nonresident.

Transferring Totals to Form 540NR

Once you have completed all sections of Schedule CA (540NR), the final step is to transfer the calculated totals to your main tax return, Form 540NR. This action integrates the detailed adjustments from the schedule into the primary form, allowing for the final calculation of your California tax liability.

You will take the total income from the schedule’s Column D and enter this amount on the corresponding line of Form 540NR. This figure represents your total adjusted gross income from all sources. Next, you will transfer the total from the schedule’s Column E, which is your California-source adjusted gross income, to its designated line on Form 540NR.

The total adjustments also need to be carried over. The sum of your subtractions from Column B is entered on Form 540NR. The sum of your additions from Column C is also entered on the appropriate line. These transfers are essential for bridging the gap between your federal and state returns.