Hi,
My wife and I are filing our taxes jointly for 2010. I was a resident of California in 2010. However, my wife was not a resident and all her income was from a different state. My question is:

1) Should I use Form 540 or 540NR for California tax return?
2) I should be able to deduct her income from California taxable income, shouldn't I? (we are already paying taxes in the other state for her portion of the income)

Thanks!

“1) Should I use Form 540 or 540NR for California tax return?”---> You need to file CA Form 540NR,CA non- resident or part year resident of CA;however, CA is your permanent home state. In the case your spouse, she can file her state income tax return as MFJ with you OR as a nonresident of CA but a full year resident of another state, she can file her state return as MFS( though you file your federal return as MFJ) because she has no CA source income to report to CA and she is NOT a full year resident of CA.If you and your spouse file your state returns as MFS, then you can file your CA Form 540.
“2) I should be able to deduct her income from California taxable income, shouldn't I? (we are already paying taxes in the other state for her portion of the income)”---->I guess it depends; as you said, since you filed your CA state return as MFJ, you( or your spouse) can claim her state income tax paid to her state on your CA return; however, if you filed your CA state return as MFS, as said above, then you can’t claim your spouse’s state income tax on your CA return as she doesn’t need to pay her income tax to CA.