Doing tax returns for two states

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AAA
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Doing tax returns for two states

Post by AAA »

This always confuses me. Say you are a resident of state A and have income and owe taxes in state B. When you do state A's tax return, you can get a credit for taxes paid to state B and it asks for something like "income subject to tax in state B." It then compares the tax paid to state B to the amount of tax state A would impose on that income and the credit is the lesser of the two.

So you do state B's return first and typically start out with a gross income amount which is then reduced with various deductions to a taxable amount upon which state B's tax is calculated. Which of these is considered "income subject to tax in state B?" One could argue that the gross amount is subject to tax in state B (and what you end up paying there depends on state B's tax policy) or one could argue that the amount actually taxed by state B is what state A would consider the income subject to tax there.

Which amount is the correct one to use?
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Re: Doing tax returns for two states

Post by SnowBog »

I haven't had to deal with this personally, yet... But have been researching it as I'll have to deal with this next year...

My impression is your "home state" taxes all income. But many states will give you a "credit" for taxes paid to another state, attempting to avoid double taxation.

As a W2 employee, my understanding is my company will track my travel and "allocate" my earnings accordingly. If I'm in a state for 2 days of "training" (no revenue generation), they'll allocate 2/365 of my gross income to that state. I'll file and pay taxes to to the state based on that, then file for the credit with my home state.

Same applies to "billable" work. It's simply x days in the state.
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Re: Doing tax returns for two states

Post by Jack FFR1846 »

SnowBog wrote: Mon Feb 08, 2021 3:23 pm As a W2 employee, my understanding is my company will track my travel and "allocate" my earnings accordingly. If I'm in a state for 2 days of "training" (no revenue generation), they'll allocate 2/365 of my gross income to that state.
That sounds very unusual. I used to work in jobs where at least a week a month, I was on an airplane, then Monday in Raleigh, Tuesday in Huntsville, Wednesday in Atlanta, Thursday and Friday in Florida. My employer was in New Hampshire and I lived in Massachusetts. My W2 had Massachusetts taxes with held. (NH has no income tax). I've never heard of keeping track of travel and paying for the number of days. I'd have a heck of a time with Canada trips....starting with a flight to BC, working back to Calgary, Toronto, Ottawa, Montreal, then flying home.
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Re: Doing tax returns for two states

Post by jebmke »

Jack FFR1846 wrote: Mon Feb 08, 2021 3:36 pm
SnowBog wrote: Mon Feb 08, 2021 3:23 pm As a W2 employee, my understanding is my company will track my travel and "allocate" my earnings accordingly. If I'm in a state for 2 days of "training" (no revenue generation), they'll allocate 2/365 of my gross income to that state.
That sounds very unusual. I used to work in jobs where at least a week a month, I was on an airplane, then Monday in Raleigh, Tuesday in Huntsville, Wednesday in Atlanta, Thursday and Friday in Florida. My employer was in New Hampshire and I lived in Massachusetts. My W2 had Massachusetts taxes with held. (NH has no income tax). I've never heard of keeping track of travel and paying for the number of days. I'd have a heck of a time with Canada trips....starting with a flight to BC, working back to Calgary, Toronto, Ottawa, Montreal, then flying home.
That would be unusual for a job that is essentially carried out in the home state. Some companies like trucking or construction will split the W2 for work performed in other states. There are few businesses that cross back and forth between DE and MD that do this for EEs like truck drivers or construction personnel. At the end of the day, a MD resident is taxed on all the income and then has to apply a DE credit (which is almost always less than the MD tax on the same income) so it really doesn't matter for MD residents whether they split it or not.
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Re: Doing tax returns for two states

Post by Makefile »

Jack FFR1846 wrote: Mon Feb 08, 2021 3:36 pm
SnowBog wrote: Mon Feb 08, 2021 3:23 pm As a W2 employee, my understanding is my company will track my travel and "allocate" my earnings accordingly. If I'm in a state for 2 days of "training" (no revenue generation), they'll allocate 2/365 of my gross income to that state.
That sounds very unusual. I used to work in jobs where at least a week a month, I was on an airplane, then Monday in Raleigh, Tuesday in Huntsville, Wednesday in Atlanta, Thursday and Friday in Florida. My employer was in New Hampshire and I lived in Massachusetts. My W2 had Massachusetts taxes with held. (NH has no income tax). I've never heard of keeping track of travel and paying for the number of days. I'd have a heck of a time with Canada trips....starting with a flight to BC, working back to Calgary, Toronto, Ottawa, Montreal, then flying home.
It's one of those things like the use tax (where everyone is technically required to remit the difference in sales tax between their home state's tax rate and the lower or nonexistent one on an out of state purchase brought into the home state) where most are unaware and there is huge noncompliance. It's a "jock tax" because nonresident income tax is usually enforced against high earners. My guess is it isn't broadly and more aggressively enforced against lower earners because any state that did so could kiss their entire convention business goodbye (espec. with NV being a no-income tax state). Here is an article about it. https://www.cpapracticeadvisor.com/tax- ... tate-lines
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Re: Doing tax returns for two states

Post by SnowBog »

Makefile wrote: Mon Feb 08, 2021 3:46 pm
Jack FFR1846 wrote: Mon Feb 08, 2021 3:36 pm
SnowBog wrote: Mon Feb 08, 2021 3:23 pm As a W2 employee, my understanding is my company will track my travel and "allocate" my earnings accordingly. If I'm in a state for 2 days of "training" (no revenue generation), they'll allocate 2/365 of my gross income to that state.
That sounds very unusual. I used to work in jobs where at least a week a month, I was on an airplane, then Monday in Raleigh, Tuesday in Huntsville, Wednesday in Atlanta, Thursday and Friday in Florida. My employer was in New Hampshire and I lived in Massachusetts. My W2 had Massachusetts taxes with held. (NH has no income tax). I've never heard of keeping track of travel and paying for the number of days. I'd have a heck of a time with Canada trips....starting with a flight to BC, working back to Calgary, Toronto, Ottawa, Montreal, then flying home.
It's one of those things like the use tax (where everyone is technically required to remit the difference in sales tax between their home state's tax rate and the lower or nonexistent one on an out of state purchase brought into the home state) where most are unaware and there is huge noncompliance. It's a "jock tax" because nonresident income tax is usually enforced against high earners. My guess is it isn't broadly and more aggressively enforced against lower earners because any state that did so could kiss their entire convention business goodbye (espec. with NV being a no-income tax state). Here is an article about it. https://www.cpapracticeadvisor.com/tax- ... tate-lines
Yep. I was floored when I learned this recently. I've had some level of travel in my job for the past 20 years, so was shocked when I discovered this. You can see the thread I started: viewtopic.php?t=332171

As I understand it, it's on your employer to provide the required information to you. (But I'm not sure it removes your personal liability if they don't. Although as Makefile noted, it's not something they probably want the hassle of trying to enforce.)

We were told that after some "updates" to our travel management system, the company will now track and provide the necessary information so we can file taxes accordingly. Oh, the joy!

And if you really want your head to explode... Let's say I have a connecting flight in A, then land in B, then drive to C for a meeting, then drive to D for a meeting the following day. My understanding is all 4 states (plus my home state) "technically" can claim taxes owed on my time there (which my company will only track in day increments). So conceptually I'll pay 4 states taxes on the same income... :oops: I can deduct those taxes from my home state.

And if that's not enough for you... Part of my income is stock grants that vest over X years. So in my example above, 2 days in a state means they get to tax 2/365 of each "vest". So I have the hassle of not only "this years" travel, but the accumulated X years of travel... :annoyed

For what it's worth, this is just more motivation for me to hit FI ASAP and be done with this insanity.
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Re: Doing tax returns for two states

Post by AAA »

This thread is wandering away from my original question - which amount on the non-resident return should be used as the "income subject to other state's tax" when doing one's resident return? The gross amount, i.e. box 1 of the W-2, or the usually smaller amount used with the tax tables?
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Re: Doing tax returns for two states

Post by jebmke »

AAA wrote: Mon Feb 08, 2021 8:05 pm This thread is wandering away from my original question - which amount on the non-resident return should be used as the "income subject to other state's tax" when doing one's resident return? The gross amount, i.e. box 1 of the W-2, or the usually smaller amount used with the tax tables?
Normally the instruction books for the state tax filings will tell you how to apportion income.
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Re: Doing tax returns for two states

Post by SnowBog »

AAA wrote: Mon Feb 08, 2021 8:05 pm This thread is wandering away from my original question - which amount on the non-resident return should be used as the "income subject to other state's tax" when doing one's resident return? The gross amount, i.e. box 1 of the W-2, or the usually smaller amount used with the tax tables?
As noted in my posts, my employer is doing a straight allocation on days in the state.

My understanding is if my gross income is $100k, and I spent 5 days working in state A, 8 days in B, 10 days in C, then I'd owe taxes on:
  • A = $1369.68 (5/365 * $100k)
  • B = $2191.78 (8/365 * $100k)
  • C = $2739.73 (10/365 * $100k)
  • Home State = $100,000
So in this example, my understanding is "income subject to other state's tax" would be the sum of A + B + C = $6,301.19. (At least this is how I've understood the explanation from employer, and what to expect on 2021's W2 statements - where they'll have this broken out for us.)

I'm not sure if this is true for "billable" hours as well... If you have an actual invoice and/or direct income from your travels - that might be easier and more accurate. So it might depend on how you earned the income...
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Re: Doing tax returns for two states

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AAA wrote: Mon Feb 08, 2021 1:48 pm This always confuses me. Say you are a resident of state A and have income and owe taxes in state B. When you do state A's tax return, you can get a credit for taxes paid to state B and it asks for something like "income subject to tax in state B." It then compares the tax paid to state B to the amount of tax state A would impose on that income and the credit is the lesser of the two.

So you do state B's return first and typically start out with a gross income amount which is then reduced with various deductions to a taxable amount upon which state B's tax is calculated. Which of these is considered "income subject to tax in state B?" One could argue that the gross amount is subject to tax in state B (and what you end up paying there depends on state B's tax policy) or one could argue that the amount actually taxed by state B is what state A would consider the income subject to tax there.
The rules vary by state; check the instructions on the relevant state tax form.

The most common rules are "gross income taxed by both states A and B, divided by gross income subject to tax in state A" or "gross income taxed by both states A and B which state A considers to be sourced to state B". Thus, if you earned $120K, and $24K was earned in state B, your credit would be limited to 20% of your state A tax. In either case, if state B taxed income which state A did not tax (for example, if state B is CA or NJ and taxed your employer contribution to your HSA), that income is not used for the credit.

Some states do use net income, but they use it for both numbers; NJ does this. Under a net income rule, if your taxable income in state A was $100K, and your taxable income in state B was $22%, your credit would be limited to 22% of your state A tax. (Some states compute your tax on your full income, and then multiply that by the percentage of income earned in the state; you would multiply your state B taxable income by that percentage.)

Another version of the rule is used by MD. In MD, you compute your tax on all your income, and what your tax would be without the dual-taxed income; that is the limit of your credit. This gives slightly more credit than a percentage does, because the MD tax is progressive.

(There is also a variant for a few pairs of states which have an agreement to reverse the credit. CA residents who earn income in VA take the credit on their VA tax for the CA tax on the double-taxed income. The total tax paid is the same whichever way the credit goes.)
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Re: Doing tax returns for two states

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SnowBog wrote: Mon Feb 08, 2021 6:43 pm And if you really want your head to explode... Let's say I have a connecting flight in A, then land in B, then drive to C for a meeting, then drive to D for a meeting the following day. My understanding is all 4 states (plus my home state) "technically" can claim taxes owed on my time there (which my company will only track in day increments). So conceptually I'll pay 4 states taxes on the same income... :oops: I can deduct those taxes from my home state.
Each state has a definition of what is work. In your example, states A and B probably do not consider you to have been working those days, and neither do the states you flew over. States C and D would each tax you for one day's work for the meeting.

As usual, you have to check with the state. CO, for example, considers the day you enter CO for the purpose of doing business there to be a work day, so if you fly in on Monday for a Tuesday-Thursday meeting and fly back on Friday, you worked five days total, four of them in CO; Friday was worked in your home state. Most other states would consider this as three days total work, all three in CO, unless you did actual work on Monday or Friday.
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Re: Doing tax returns for two states

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grabiner wrote: Mon Feb 08, 2021 9:35 pm
SnowBog wrote: Mon Feb 08, 2021 6:43 pm And if you really want your head to explode... Let's say I have a connecting flight in A, then land in B, then drive to C for a meeting, then drive to D for a meeting the following day. My understanding is all 4 states (plus my home state) "technically" can claim taxes owed on my time there (which my company will only track in day increments). So conceptually I'll pay 4 states taxes on the same income... :oops: I can deduct those taxes from my home state.
Each state has a definition of what is work. In your example, states A and B probably do not consider you to have been working those days, and neither do the states you flew over. States C and D would each tax you for one day's work for the meeting.

As usual, you have to check with the state. CO, for example, considers the day you enter CO for the purpose of doing business there to be a work day, so if you fly in on Monday for a Tuesday-Thursday meeting and fly back on Friday, you worked five days total, four of them in CO; Friday was worked in your home state. Most other states would consider this as three days total work, all three in CO, unless you did actual work on Monday or Friday.
Apologies to OP if this is off topic...

Garbiner - so is this just laziness on my employers part? I've sat through their "training" and re-read the documentation several times. They are using a straight "how many days" were you in the state approach. Its linked to our travel system, so any flights/hotels will automatically trigger the process. (If we drive out-of-state, we are supposed to make manual entries.)

Likewise, if the above is how my employer is tracking this, will do state(s) withholding, and reports on my year end W2 - am I supposed to follow it? Or are you saying I could make the case that income was misreported by my employer?
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Re: Doing tax returns for two states

Post by grabiner »

SnowBog wrote: Mon Feb 08, 2021 9:43 pm
grabiner wrote: Mon Feb 08, 2021 9:35 pm
SnowBog wrote: Mon Feb 08, 2021 6:43 pm And if you really want your head to explode... Let's say I have a connecting flight in A, then land in B, then drive to C for a meeting, then drive to D for a meeting the following day. My understanding is all 4 states (plus my home state) "technically" can claim taxes owed on my time there (which my company will only track in day increments). So conceptually I'll pay 4 states taxes on the same income... :oops: I can deduct those taxes from my home state.
Each state has a definition of what is work. In your example, states A and B probably do not consider you to have been working those days, and neither do the states you flew over. States C and D would each tax you for one day's work for the meeting.

As usual, you have to check with the state. CO, for example, considers the day you enter CO for the purpose of doing business there to be a work day, so if you fly in on Monday for a Tuesday-Thursday meeting and fly back on Friday, you worked five days total, four of them in CO; Friday was worked in your home state. Most other states would consider this as three days total work, all three in CO, unless you did actual work on Monday or Friday.
Apologies to OP if this is off topic...

Garbiner - so is this just laziness on my employers part? I've sat through their "training" and re-read the documentation several times. They are using a straight "how many days" were you in the state approach. Its linked to our travel system, so any flights/hotels will automatically trigger the process. (If we drive out-of-state, we are supposed to make manual entries.)
In theory, your employer is supposed to know the tax laws of every state in which it pays taxable salary. In practice, this doesn't work out, and there can be all kinds of issues involved that the employer may not know about, or one part may know about and another may not. (For example, if you were stranded in the city an extra day due to a canceled flight, is that a workday in that state? Does it matter whether the day is a weekend? Does it become a workday if you worked from your hotel on a company report?)
Likewise, if the above is how my employer is tracking this, will do state(s) withholding, and reports on my year end W2 - am I supposed to follow it? Or are you saying I could make the case that income was misreported by my employer?
If your employer under-reports state income on your W-2, there should be no problem; a state won't complain if you report more income than it thinks you earned, because it is common to have income which is not reported for some reason.

If your employer over-reports, you may want to get a corrected W-2, particularly if your state return doesn't otherwise document things. (For example, some states have a formula on the return for prorating income; if you report on that form that you worked 10 days in state out of 200 days, you have documented to the state why you reported exactly 5% of your annual salary as being earned in that state.)
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Re: Doing tax returns for two states

Post by SnowBog »

grabiner wrote: Mon Feb 08, 2021 10:07 pm
SnowBog wrote: Mon Feb 08, 2021 9:43 pm
grabiner wrote: Mon Feb 08, 2021 9:35 pm
SnowBog wrote: Mon Feb 08, 2021 6:43 pm And if you really want your head to explode... Let's say I have a connecting flight in A, then land in B, then drive to C for a meeting, then drive to D for a meeting the following day. My understanding is all 4 states (plus my home state) "technically" can claim taxes owed on my time there (which my company will only track in day increments). So conceptually I'll pay 4 states taxes on the same income... :oops: I can deduct those taxes from my home state.
Each state has a definition of what is work. In your example, states A and B probably do not consider you to have been working those days, and neither do the states you flew over. States C and D would each tax you for one day's work for the meeting.

As usual, you have to check with the state. CO, for example, considers the day you enter CO for the purpose of doing business there to be a work day, so if you fly in on Monday for a Tuesday-Thursday meeting and fly back on Friday, you worked five days total, four of them in CO; Friday was worked in your home state. Most other states would consider this as three days total work, all three in CO, unless you did actual work on Monday or Friday.
Apologies to OP if this is off topic...

Garbiner - so is this just laziness on my employers part? I've sat through their "training" and re-read the documentation several times. They are using a straight "how many days" were you in the state approach. Its linked to our travel system, so any flights/hotels will automatically trigger the process. (If we drive out-of-state, we are supposed to make manual entries.)
In theory, your employer is supposed to know the tax laws of every state in which it pays taxable salary. In practice, this doesn't work out, and there can be all kinds of issues involved that the employer may not know about, or one part may know about and another may not. (For example, if you were stranded in the city an extra day due to a canceled flight, is that a workday in that state? Does it matter whether the day is a weekend? Does it become a workday if you worked from your hotel on a company report?)
Likewise, if the above is how my employer is tracking this, will do state(s) withholding, and reports on my year end W2 - am I supposed to follow it? Or are you saying I could make the case that income was misreported by my employer?
If your employer under-reports state income on your W-2, there should be no problem; a state won't complain if you report more income than it thinks you earned, because it is common to have income which is not reported for some reason.

If your employer over-reports, you may want to get a corrected W-2, particularly if your state return doesn't otherwise document things. (For example, some states have a formula on the return for prorating income; if you report on that form that you worked 10 days in state out of 200 days, you have documented to the state why you reported exactly 5% of your annual salary as being earned in that state.)
Thanks for the clarity!

And looking back through the employer info, it looks like there is a concept of a "threshold" for how long you need to be in a state before they expect taxes to be withheld. The new tool will apparently track that, and if we cross the threshold will do automatic withholdings (or recharacterize withholdings).
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Re: Doing tax returns for two states

Post by scrabbler1 »

AAA wrote: Mon Feb 08, 2021 1:48 pm This always confuses me. Say you are a resident of state A and have income and owe taxes in state B. When you do state A's tax return, you can get a credit for taxes paid to state B and it asks for something like "income subject to tax in state B." It then compares the tax paid to state B to the amount of tax state A would impose on that income and the credit is the lesser of the two.

So you do state B's return first and typically start out with a gross income amount which is then reduced with various deductions to a taxable amount upon which state B's tax is calculated. Which of these is considered "income subject to tax in state B?" One could argue that the gross amount is subject to tax in state B (and what you end up paying there depends on state B's tax policy) or one could argue that the amount actually taxed by state B is what state A would consider the income subject to tax there.

Which amount is the correct one to use?
I had to file a non-resident return (your State B) for 8 years when I worked in State B while I lived in State A. The non-resident return included a Column A gross income and a Column B gross income. Column A showed all my income, had I been filing a State B resident return, with income subject to the tax rules of State B. Column B income includes only the income earned within State B. Column A's gross income is reduced by State B's permissible deductions before tax is determined on it. That tax is then prorated by the ratio of Column B's gross income divided Colum A's gross income to determine State B's tax liability.

Then I move to State A. I complete State A's resident tax return using State A's tax rules, which are slightly different from State B's, including the definition of income. When it comes time to determine the resident credit, there is a Resident Credit form which has some similarities to State B's non-resident form. It has a Column A and Column B for income. Column A shows the State A income already shown earlier in the State A resident form. But Column B shows the Column B income as it was shown in the State B non-resident form. State A's income adjustments are applied to Column A before the ratio of Column B divided by Column A is applied to the State A tax liability. That ratio is usually pretty close to the similarly calculated ratio from State B's non-resident form.

Each form's Column A reflected each state's own tax rules including the definition of income.

The resident credit is the lesser of the prorated tax on the Resident Credit form and State B's actual tax liability, as you suggested. That credit is then subtracted from State A's tax liability to get a net tax owed to State A.
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Re: Doing tax returns for two states

Post by AAA »

grabiner wrote: Mon Feb 08, 2021 9:30 pmThe rules vary by state; check the instructions on the relevant state tax form.
Thanks all for the input. I reviewed my state's instructions and it does say to use the gross compensation from the non-resident state. I must have missed that in my previous readings.
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Re: Doing tax returns for two states

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AAA wrote: Tue Feb 09, 2021 9:09 am
grabiner wrote: Mon Feb 08, 2021 9:30 pmThe rules vary by state; check the instructions on the relevant state tax form.
Thanks all for the input. I reviewed my state's instructions and it does say to use the gross compensation from the non-resident state. I must have missed that in my previous readings.
One other point is that you will get a credit on your home state return for the tax paid to the second state. HOWEVER, it may not be dollar for dollar. If the second state has a higher tax rate than your home state your home state will (probably) reduce your taxable income by the amount of income that was subject to tax in the 2nd state.

This effectively gives you a credit for the taxes paid to the second state at your home state's rate.
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Re: Doing tax returns for two states

Post by AAA »

The 19th hole wrote: Tue Feb 09, 2021 12:17 pm One other point is that you will get a credit on your home state return for the tax paid to the second state. HOWEVER, it may not be dollar for dollar. If the second state has a higher tax rate than your home state your home state will (probably) reduce your taxable income by the amount of income that was subject to tax in the 2nd state.

This effectively gives you a credit for the taxes paid to the second state at your home state's rate.
Yes, as I mentioned, my state compares the tax paid to the non-resident state to the amount of tax my state would impose on that amount of income and the credit is the lesser of the two.
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Re: Doing tax returns for two states

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Before my company relocated from New York to New Jersey, I filed a NY resident tax return because I lived in NY. Some of my coworkers lived in NJ so they filed resident returns for NJ and non-resident returns for NY. Because NY's tax rates are higher than NJ's, many of those coworkers paid higher taxes to NY but paid zero to NJ because their NY tax credit on their NJ tax return wiped out their NJ tax bill.

When the company moved to NJ, we NY residents had to file NJ non-resident returns, while our NJ coworkers filed only NJ resident returns. We New Yorkers paid some NJ taxes but the resident credit acted as a carve-out of our NY tax bill. My NJ coworkers, however, saw their overall tax bills drop because they no longer had to file NY non-resident returns, so they paid only lower NJ taxes.
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Re: Doing tax returns for two states

Post by SnowBog »

Also - keep in mind some states have some form of a "reciprocity" agreement in place. These can impact how you file and/or deal with credits/etc.
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Re: Doing tax returns for two states

Post by theorist »

Hi,

I’m reviving this thread because I have a very specific, related question. (Perhaps the answer is basically already in the thread, and I suspect it is; in this case I’m just checking my understanding!)

Imagine my normal job is in state A, and I have my primary residence there.

However, I consult for another company in state B. I do this two different ways:

— for 3/4 of the year, I stay at home in state A but consult part time.

— for 1/4 of the year, I work full time for the company and reside in state B, or at least spend a lot of time there.

What is the tax situation? I could imagine two reasonable answers:

1 — I pay taxes on my normal job income and my 3/4 year consulting income in state A, and taxes on my 1/4 of the year consulting income in state B.

2 — I pay taxes on all consulting income in state B, and taxes on my normal income in state A.

Is one of these close to the truth? And is this situation complicated enough that I should consult a tax lawyer or accountant (and which)? I’ve been advised by the company I’m consulting for that it might be — but isn’t necessarily — advantageous to be compensated through a corporate entity I set up, instead of directly as a W2 employee, for the consulting. I’m not sure about that either, and could use advice (though I’ll seek more official legal advice too).

Thanks in advance for any responses or advice...
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Re: Doing tax returns for two states

Post by grabiner »

theorist wrote: Tue May 04, 2021 12:07 am Imagine my normal job is in state A, and I have my primary residence there.

However, I consult for another company in state B. I do this two different ways:

— for 3/4 of the year, I stay at home in state A but consult part time.

— for 1/4 of the year, I work full time for the company and reside in state B, or at least spend a lot of time there.

What is the tax situation? I could imagine two reasonable answers:

1 — I pay taxes on my normal job income and my 3/4 year consulting income in state A, and taxes on my 1/4 of the year consulting income in state B.

2 — I pay taxes on all consulting income in state B, and taxes on my normal income in state A.
What is correct depends on the states.

The two overriding principles: Nonresidents pay state tax only on income with a source in the state. Residents pay state tax on all their income, but can take a credit for tax paid to another state. What varies by state is which income is taxed and how it is sourced.

If you spend only three months in State B, then you probably won't be considered a resident. (Some states have a rule that if you maintain a permanent home there, such as a full-year rental apartment rather than a summer lease, you will be taxed as a resident if you spend at least X days in the state, but I don't know of any state which uses a time as short as three months.)

Some pairs of states (mostly neighboring states with a lot of cross-commuting, such as MD/VA and NJ/PA) have reciprocity and do not tax each other's residents, although this normally applies only to salary. If you have consulting income from self-employment, State B will probably tax it even if there is reciprocity. If you have W-2 income and there is reciprocity, you pay only State A tax on all your W-2 income.

Most states consider work from home to have a source at your home, but some states consider the source to be at your regular work location.

If State B considers only work in the state to have a source in the state, then you pay State B income tax on your work there. You pay State A tax on all your income, but you can take a credit for the tax imposed by State B.

If State B considers work at home to have a source in the state, then you pay State B income tax on all your consulting income. It matters then how State A structures its credit for tax paid to other states. Some states give a credit for all nonresident income taxed to another state, regardless of source. Other states give a credit only for income taxed to the other state, in which case you will pay full State A tax on the work-from-home income unless State A also considers that income to have a source in State B.
I’ve been advised by the company I’m consulting for that it might be — but isn’t necessarily — advantageous to be compensated through a corporate entity I set up, instead of directly as a W2 employee, for the consulting. I’m not sure about that either, and could use advice (though I’ll seek more official legal advice too).
You will need tax advice on how State B sources both types of income. What you need is not specifically legal advice, but tax advice from a State B accountant. Your company is unlikely to be willing to give you tax advice
Wiki David Grabiner
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Re: Doing tax returns for two states

Post by hachiko »

theorist wrote: Tue May 04, 2021 12:07 am Hi,

I’m reviving this thread because I have a very specific, related question. (Perhaps the answer is basically already in the thread, and I suspect it is; in this case I’m just checking my understanding!)

Imagine my normal job is in state A, and I have my primary residence there.

However, I consult for another company in state B. I do this two different ways:

— for 3/4 of the year, I stay at home in state A but consult part time.

— for 1/4 of the year, I work full time for the company and reside in state B, or at least spend a lot of time there.

What is the tax situation? I could imagine two reasonable answers:

1 — I pay taxes on my normal job income and my 3/4 year consulting income in state A, and taxes on my 1/4 of the year consulting income in state B.

2 — I pay taxes on all consulting income in state B, and taxes on my normal income in state A.

Is one of these close to the truth? And is this situation complicated enough that I should consult a tax lawyer or accountant (and which)? I’ve been advised by the company I’m consulting for that it might be — but isn’t necessarily — advantageous to be compensated through a corporate entity I set up, instead of directly as a W2 employee, for the consulting. I’m not sure about that either, and could use advice (though I’ll seek more official legal advice too).

Thanks in advance for any responses or advice...
Why not provide the states? Different states will have different rules. Hopefully state A and state B have the same sourcing rules, otherwise, you could end up without a credit in state A.
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Re: Doing tax returns for two states

Post by random_walker_77 »

theorist wrote: Tue May 04, 2021 12:07 am Hi,

I’m reviving this thread because I have a very specific, related question. (Perhaps the answer is basically already in the thread, and I suspect it is; in this case I’m just checking my understanding!)

Imagine my normal job is in state A, and I have my primary residence there.

However, I consult for another company in state B. I do this two different ways:

— for 3/4 of the year, I stay at home in state A but consult part time.

— for 1/4 of the year, I work full time for the company and reside in state B, or at least spend a lot of time there.

What is the tax situation? I could imagine two reasonable answers:

1 — I pay taxes on my normal job income and my 3/4 year consulting income in state A, and taxes on my 1/4 of the year consulting income in state B.

2 — I pay taxes on all consulting income in state B, and taxes on my normal income in state A.

Is one of these close to the truth? And is this situation complicated enough that I should consult a tax lawyer or accountant (and which)? I’ve been advised by the company I’m consulting for that it might be — but isn’t necessarily — advantageous to be compensated through a corporate entity I set up, instead of directly as a W2 employee, for the consulting. I’m not sure about that either, and could use advice (though I’ll seek more official legal advice too).

Thanks in advance for any responses or advice...
It depends on state B. For example, if state B is california and you never set foot in CA all year, then it could be either 1) or 2), depending on whether you did the work as a w2 employee or as a 1099 contractor. As a w2 employee, it's treated as 1) and CA doesn't tax it. But as a 1099 contractor for a CA company, then it's 2) and you owe CA tax on the contract work for the entire year, even though the work was performed in another state and you didn't even set foot in California. See the section on the “Never Set Foot” Rule in this article:

https://www.palmspringstaxandtrustlawye ... usinesses/
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Re: Doing tax returns for two states

Post by theorist »

Thanks for the help!

State A is California. State B is New York. Both have rather aggressive tax policies, I have been told...
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grabiner
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Re: Doing tax returns for two states

Post by grabiner »

theorist wrote: Tue May 04, 2021 11:13 pm Thanks for the help!

State A is California. State B is New York. Both have rather aggressive tax policies, I have been told...
NY sources work from home to your workplace, while CA sources it to your home and does not allow a credit for income with a source in CA. Thus, if you get the income as W-2 income, you will owe NY tax on all of it from NY, and get a credit on your CA tax only for the days actually worked in NY. You will pay double tax on work from home in CA for your NY employer.
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Re: Doing tax returns for two states

Post by theorist »

grabiner wrote: Tue May 04, 2021 11:30 pm
theorist wrote: Tue May 04, 2021 11:13 pm Thanks for the help!

State A is California. State B is New York. Both have rather aggressive tax policies, I have been told...
NY sources work from home to your workplace, while CA sources it to your home and does not allow a credit for income with a source in CA. Thus, if you get the income as W-2 income, you will owe NY tax on all of it from NY, and get a credit on your CA tax only for the days actually worked in NY. You will pay double tax on work from home in CA for your NY employer.
I am getting it as 1099 income, as it turns out. Does this change anything?
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Re: Doing tax returns for two states

Post by grabiner »

theorist wrote: Tue May 04, 2021 11:31 pm
grabiner wrote: Tue May 04, 2021 11:30 pm
theorist wrote: Tue May 04, 2021 11:13 pm Thanks for the help!

State A is California. State B is New York. Both have rather aggressive tax policies, I have been told...
NY sources work from home to your workplace, while CA sources it to your home and does not allow a credit for income with a source in CA. Thus, if you get the income as W-2 income, you will owe NY tax on all of it from NY, and get a credit on your CA tax only for the days actually worked in NY. You will pay double tax on work from home in CA for your NY employer.
I am getting it as 1099 income, as it turns out. Does this change anything?
You'll have to check with your tax advisor, including the details of whether it may be treated differently if it goes through a corporation.
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Re: Doing tax returns for two states

Post by theorist »

Ok, thanks!

I’m surprised double taxation is even possible. It seems like that is an issue that ought to be fixed.
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