Passive Losses for State Returns - TurboTax must be wrong

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Scorpion
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Joined: Mon Sep 14, 2009 6:56 am

Passive Losses for State Returns - TurboTax must be wrong

Post by Scorpion »

I have a burning tax question. I tried to create a Fairmark login, but I am still waiting for their confirming email, and I know my Boglehead friends seem to know all this stuff, so I figured I would try, even though not really a tax-focused community. Here's the initial question. I have some follow-up questions, but I'd like to at least start with this.

I am an investor in various rental real estate partnerships. I am a resident of Wisconsin. I understand how passive losses work at the federal level, and I understand basis rules, the at risk rules and the passive activity loss rules. What I do not understand is how these rules work at the state level. For example, in Iowa I had a (-$844) loss from one project and $641 income from another for 2012. But because Line 17 of my Federal 1040 is zero (because I had more passive losses than passive income), TurboTax doesn’t even ask me what portion of my federal Rental Real Estate Income (of zero) was from Iowa sources. Isn’t this clearly wrong? If I had $100,000 of passive Iowa income, and $101,000 of passive losses from all sources, this would mean I pay zero Iowa income tax. I can’t imagine that is correct. I appreciate any thoughts. I bought the state return for Iowa from TT to help me with this, instead I am afraid it was a total waste of $40.

Thanks for any help you can provide!
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grabiner
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Re: Passive Losses for State Returns - TurboTax must be wron

Post by grabiner »

I have no idea how Iowa handles non-resident passive losses; you'll have to check the Iowa tax law or ask your Iowa tax advisor. However, if you do need to report the Iowa-sourced income, you should be able to enter numbers manually on your state return for things which are state-specific but which TurboTax doesn't know.

I had to do this on my NJ taxes, because I have a Health Savings Account, which is not recognized in NJ. TurboTax knows about the account (since I filed a federal form for it), but it didn't ask me whether I had any dividends or interest that were taxable in NJ but not reported on my federal return. However, it did allow me to make a manual entry for the interest on my bank account and the dividends on my brokerage account, and then computed the tax correctly.
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Scorpion
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Re: Passive Losses for State Returns - TurboTax must be wron

Post by Scorpion »

I'm pretty sure my passive loss for non-resident states question is universal to most states. I think if I bought Oklahoma and Nebraska, TT would handle it the same way. Whether that same way is the right way, though, is the question. Hopefully someone has run into this before. I really don't want to hire an accountant to do my taxes - and I am a former CPA (never practiced) and should theoretically be able to do them myself.
MarkNYC
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Re: Passive Losses for State Returns - TurboTax must be wron

Post by MarkNYC »

I think you're asking 2 different questions. One, does Iowa allow passive activity losses, and two, how to enter nonresident passive activity income and losses in Turbotax. I can't answer the second, but as to the first, not all states allow passive losses, but Iowa does. As a Wisconsin resident, if you have Iowa-source passive income and a greater amount of non-Iowa source passive losses, you should still owe tax to Iowa.
Topic Author
Scorpion
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Re: Passive Losses for State Returns - TurboTax must be wron

Post by Scorpion »

MarkNYC wrote:I think you're asking 2 different questions. One, does Iowa allow passive activity losses, and two, how to enter nonresident passive activity income and losses in Turbotax. I can't answer the second, but as to the first, not all states allow passive losses, but Iowa does. As a Wisconsin resident, if you have Iowa-source passive income and a greater amount of non-Iowa source passive losses, you should still owe tax to Iowa.
Thanks for your reply. As to first question, your answer that I should owe tax to Iowa is exactly what I would have expected. In fact, I had already filled out the Iowa return by hand. I only ordered the $40 turbotax state return for Iowa so that I could see if I should be filing for an Iowa net operating loss (in other words, carrying over my excess Iowa passive losses to a future year). Instead, TurboTax is leading me further astray.

The conventional wisdom from tax folks I have talked to is that I should be filing a return in every state, even if I only have passive losses that year. My own research indicates that that makes no sense for states like NE and IL, where an individual is specifically not allowed to have a net operating loss unless they also have a federal net operating loss. Iowa seems to allow for net operating losses for individuals, but TurboTax is not filling it out. Am I supposed to be tracking a separate set of passive losses at each state level, as opposed to the federal level? Any thoughts? One aside - TurboTax never asks what state-source the income is from when entering the K-1s, nor is there any way to hard code it in.
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