tearing my hair out with multiple state tax return

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2sls
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tearing my hair out with multiple state tax return

Post by 2sls »

IN 2012 my spouse and I lived in California and worked in California and part of 2013. In the second half of 2013, I found a new job in the midwest and moved and started the job while the spouse stayed and continued to work in California. I checked and there is no reciprocal tax treaty between the two states.

I am using Turbotax, with two states, but I have no idea if I am doing the state taxes correctly as I am guessing there is some interaction between the two states that I am failing to grasp.

Can someone who's unfortunately had the same headache as me in the past shed some light on the process?

Namely, I would like an intuitive (if possible) understanding of how the sources of our wages are treated by two different states, namely
the spouse's income from California in 2013, my income from California in 2013, my income from my new state in 2013, and our passive investment income (which I do not understand how to prorate to an individual state)

I am entirely happy to send this to an accountant, but I really want to understand what's going on myself.
davebarnes
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Hire a professional

Post by davebarnes »

Hire someone to prepare your return.
That is what I did in 1981 and I still have the same firm (son as father retired) doing my taxes.
Peace of mind.
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#Cruncher
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Re: tearing my hair out with multiple state tax return

Post by #Cruncher »

I'm a New York resident but have worked in Connecticut for many years. Maybe my experience will be helpful. Turbo Tax prepares a NY resident return and a CT non-resident return. Both state's returns start with the Adjusted Gross Income from the Federal return and then make additions (e.g., tax-exempt interest on out-of-state municipal bonds) and subtractions (e.g., interest on Treasury bonds) to arrive at the taxable income for the state.

The CT return calculates the income tax based on this total taxable income. But then it pro-rates it based on the fraction that my CT wages are of the total income. Turbo Tax calculates the CT tax first and then enters it as a credit on the NY return. So my total tax for both states is the same as it would have been had I worked in NY instead of CT and filed only the NY return. It really doesn't matter what the CT tax is since it is credited against the NY tax.

Assuming you and your wife file a joint return, I would expect Turbo Tax for 2013 to file a resident return for CA and a non-resident return for the midwest state. (Even if you filed separately I'd expect the same since you say you started your new job in the midwest "in the second half of 2013".) In this case, check the CA return to see if Turbo Tax put in a credit for the other state's tax.

If CA and the midwest state work the same as NY and CT, you shouldn't have to prorate your non-wage income between the two states. The only thing you should need to separate is the wages between CA and the other state.
friar1610
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Re: tearing my hair out with multiple state tax return

Post by friar1610 »

I had to deal with both MA and VT this year. I have been a Turbo Tax user for years, but I found TT very confusing when dealing with 2 separate state returns. I ended up using TT for the Federal return and doing my two state returns the old fashioned way.

My wife and I are retired, so our "salary" was SS, my military pension and a small pension she receives. Since we moved at the beginning of July, I just attributed 50% each (6 months worth) to VT (which taxes all of those income sources) and MA (which does not tax SS or military pensions.)

For interest income I made up an Excel spreadsheet and applied monthly income payments to the appropriate state based on when I received them. Same with CG distributions from mutual funds that declare them monthly or quarterly. For distributions declared at the end of the calendar year, I attributed them to MA since that's where I was living when I realized them.

I also sold several blocks of mutual funds during the year to pay for my new house. If I realized the CGs from those sales while still a VT resident, I attributed them to VT; same for MA.

For charitable deductions, I claimed them according to which state I lived in when I made the donations.

This was a bit of work but I felt more confident doing things this way than using TT which came up with some things that made no sense to me. Next year I will be dealing only with one state, so I plan to use TT for both Federal and state.
Friar1610 | 50-ish/50-ish - a satisficer, not a maximizer
ralph124cf
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Re: tearing my hair out with multiple state tax return

Post by ralph124cf »

State tax laws differ greatly. If you declare that you are still a California resident, then you file a non-resident return for income from the Midwest state, and that is credited against your California tax. If you claim that you are now a Midwest resident, then things get more complicated. You may, or may not, save on taxes, but you will probably need professional help the first year.

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sscritic
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Re: tearing my hair out with multiple state tax return

Post by sscritic »

Most states tax income when you are a resident, no matter what the source, and income sourced in the state, no matter where you reside.

If you lived in A, moved to B, but rented out your house in A and kept working in A, then got a job in B and continued to rent out your house in A, then:

A wants to tax all the A income while living in A, the A income while living in B, and the rental income from the house in A while living in B.

B wants to tax the A income while living in B, the B income while living in B, and the rental income from the house in A while living in B.

Two items are taxed twice, but you will get a credit for those extra taxes paid to one state on the tax return of the other, so you really aren't taxed twice, although you pay tax at the higher of the two rates.

I like paper and instructions written on paper when doing these things. Once you have everything worked out, you can see if your tax software is as smart as you are.
ralph124cf
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Re: tearing my hair out with multiple state tax return

Post by ralph124cf »

There are some other really strange state rules when a husband and wife claim residence in two different states, mostly having to do with the split of deductions and investment income.

Ralph
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grabiner
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Re: tearing my hair out with multiple state tax return

Post by grabiner »

2sls wrote:IN 2012 my spouse and I lived in California and worked in California and part of 2013. In the second half of 2013, I found a new job in the midwest and moved and started the job while the spouse stayed and continued to work in California. I checked and there is no reciprocal tax treaty between the two states.

I am using Turbotax, with two states, but I have no idea if I am doing the state taxes correctly as I am guessing there is some interaction between the two states that I am failing to grasp.
The interaction between the two states is that you do not normally pay double state tax on income; if the same income is taxed by two states, you pay tax to one state, and take a credit in the other state. The credit is usually the lower of the tax you actually paid, or a prorated share of the tax in the state where you claim the credit; thus, you pay tax at the higher of the two states' rates. TurboTax will help you compute the credit. Which direction you take the credit depends on the pair of states involved. For most states, you pay the tax to the state in which you earned the income, and then take a credit in CA, so you must do the return for the other state first.

The extra complication, which TurboTax cannot answer for you, is where you are a resident; check with the states involved. If your permanent home is in CA and you intend to return there, you may be a CA resident for the full year; you may also be a part-year resident of your new state even though it is not your permanent home if you maintained a home there and spent enough days there. If you do not intend to return to CA, you may be a part-year resident of CA and a part-year resident of your new state. Your spouse is a full-year resident of CA.

If you are a full-year resident of CA, you owe CA tax on all of your income. You will also owe tax to the second state on income earned in the state, and if you are a part-year resident, you will owe tax on all your income earned while you were a resident. You can then claim the tax.

If your spouse is a full-year resident of CA and you are a part-year resident, you will probably have to file separate CA tax returns, but if you are a part-year resident of CA and a part-year resident of another state, you may not have any double-taxed income (unless you continued to earn CA income after moving to the other state, or earned income in another state while still living in CA.)
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cherijoh
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Re: tearing my hair out with multiple state tax return

Post by cherijoh »

2sls wrote:IN 2012 my spouse and I lived in California and worked in California and part of 2013. In the second half of 2013, I found a new job in the midwest and moved and started the job while the spouse stayed and continued to work in California. I checked and there is no reciprocal tax treaty between the two states.

I am using Turbotax, with two states, but I have no idea if I am doing the state taxes correctly as I am guessing there is some interaction between the two states that I am failing to grasp.

Can someone who's unfortunately had the same headache as me in the past shed some light on the process?

Namely, I would like an intuitive (if possible) understanding of how the sources of our wages are treated by two different states, namely
the spouse's income from California in 2013, my income from California in 2013, my income from my new state in 2013, and our passive investment income (which I do not understand how to prorate to an individual state)

I am entirely happy to send this to an accountant, but I really want to understand what's going on myself.
I expect the problem relates to the fact that your wife was working in CA while you were in Midwest. Did you indicate you were a resident of the new state for part of the year?

I live in Charlotte NC which is 10 miles up the road from the SC state line. So there are lots of married couples where one person works in one state and the other one works in the other state. Believe it or not, to get this correct they have to first do a dummy MFS federal return. I have heard it is a pain from those couples I know who are in this situation. But it is a boon for the professional tax preparers.
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grabiner
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Re: tearing my hair out with multiple state tax return

Post by grabiner »

cherijoh wrote:I live in Charlotte NC which is 10 miles up the road from the SC state line. So there are lots of married couples where one person works in one state and the other one works in the other state. Believe it or not, to get this correct they have to first do a dummy MFS federal return. I have heard it is a pain from those couples I know who are in this situation. But it is a boon for the professional tax preparers.
Is there something unusual about NC/SC here? In most cases, you only need to do a dummy separate return if you will be filing separately in one of the states because one spouse is a resident and the other is a non-resident. A married couple can file joint resident returns in their state of residence and joint non-resident returns in a state in which either one earns income. And this is extremely common in many states which have commuters but no reciprocity; for example, there are many married couples in NJ or CT in which one spouse works in NY.
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cherijoh
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Re: tearing my hair out with multiple state tax return

Post by cherijoh »

grabiner wrote:
cherijoh wrote:I live in Charlotte NC which is 10 miles up the road from the SC state line. So there are lots of married couples where one person works in one state and the other one works in the other state. Believe it or not, to get this correct they have to first do a dummy MFS federal return. I have heard it is a pain from those couples I know who are in this situation. But it is a boon for the professional tax preparers.
Is there something unusual about NC/SC here? In most cases, you only need to do a dummy separate return if you will be filing separately in one of the states because one spouse is a resident and the other is a non-resident. A married couple can file joint resident returns in their state of residence and joint non-resident returns in a state in which either one earns income. And this is extremely common in many states which have commuters but no reciprocity; for example, there are many married couples in NJ or CT in which one spouse works in NY.
Not sure why that is since I am single. But I do recall them saying that they would have been better off if they both worked in the SC while living in NC or vice versa.
donall
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Re: tearing my hair out with multiple state tax return

Post by donall »

I've found that TurboTax does not do a good job with multistate returns. As another poster found, it may be easier to just do the state returns by hand.
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