Multi-State W2 Question

[ETax847]

New client came to me with a multistate return. Her W2 shows gross wages of 100k, but on the breakouts between the states it shows 70k to 1 state and 60k to the other. Does the client need to get a corrected W2?

[Lion EA]

If they are states that start with federal AGI, then it may not matter how they broke out the states. Is one her resident state and the other her nonresident state where she works? Or, did she move during the year?

[ETax847]

Client lived in SC from Jan –Sept, worked in IL the entire time, then move to IL in Sept. So is the W2 correct then?

[Lion EA]

So all of her income is from IL, and IL will tax her on all of it.. SC will tax the income earned in IL while a SC resident, but give her credit for taxes she paid on that income to IL while a SC resident (I think; I don't have any SC returns this year). I don't use ATX, so can't tell you how to achieve that goal. Read the instructions for SC PY returns. I'm guessing you're familiar with IL NRPY returns....

Essentially, you'll have a federal column on her states. SC will have the federal income and a SC column for income earned while a SC resident from all sources. If there's a column for SC income earned while a NR, it will be blank. IL will have all federal income and all IL income, some earned as a NR and some earned as a resident. When you divide her earnings into columns, even if you start with pencil and paper or Excel, you'll see where each belongs -- after reading the SC instructions.

Also, you'll want her pay stub from her last payroll while a SC resident so you know have her Y-T-D amounts while a SC resident.

[ETax847]

The W2 does not show that IL will be taxing all of the income based on the allocation.

[Jack from Ohio]

The W2 does not show that IL will be taxing all of the income based on the allocation.

Not relevant.

Lion is correct. Just make the entries for part year as she indicated.

[Lion EA]

IL gets first dibs because she earned all her income in IL. SC will want a share for the time she resided in SC, but will settle for a share based on their formula for taxes paid to another jurisdiction on that same income. Read the IL instructions too.

[mcb39]

Lion is correct. I had a WI resident who had the W2 Federal wages split between six different states. I had to file five non-resident state returns and pay the proportionate part. Then, WI has a form OS which calculates the credit you get for the tax paid to the other states for WI. Basically, WI taxes the employee for all of it because he is a resident here. (These are really fun) but not so difficult once you get a handle on it. There are probably different rules for different states, but that is the way it is done here.

[Terry D EA]

Just ot add, Lion is correct and SC will give credit for taxes paid to another state.

[MAMalody]

New client came to me with a multistate return. Her W2 shows gross wages of 100k, but on the breakouts between the states it shows 70k to 1 state and 60k to the other. Does the client need to get a corrected W2?

You do not need a new W-2. Just make sure the info is handled correctly to the appropriate state return.

[mcb39]

This is when the All States Quickfinder comes in handy. I buy it about every third year or so.

[Lion EA]

Or, The Tax Book's All States Edition.

[joanmcq]

I do a lot of states so I've been getting one or the other every year. I actually like multi state returns!

[SaraEA]

Lion is correct that if the state starts with federal AGI, it really doesn't matter how the W2 is broken out. The states all give the taxpayer credit for taxes paid to other states on the same income (where it was earned). All the fancy math is to apply the highest tax rate to that income.

For example, say you earned $100k altogether. You made $1k of that income in one state. Normally, if you only made $1k that state wouldn't tax you at all. But it wants its piece of the cake, so it calculates your income tax rate as if you made $100k there and then applies that rate to the $1k you really did make there. The state where you live and made $99k will do the same thing, but it will give you credit for the taxes you paid to the other state. This is where it gets tricky. Say the first state taxes you 5%, so you paid them $50. The state where you live taxes you 7% on that high income of yours, so the tax on that $1k is $70, and you owe them $20 more after the credit.

If the W2 isn't broken out, it doesn't matter because the one state will still give you credit for the taxes paid to the other, and tack on more if its own rate is higher.

[Jack from Ohio]

Lion is correct that if the state starts with federal AGI, it really doesn't matter how the W2 is broken out. The states all give the taxpayer credit for taxes paid to other states on the same income (where it was earned). All the fancy math is to apply the highest tax rate to that income.

For example, say you earned $100k altogether. You made $1k of that income in one state. Normally, if you only made $1k that state wouldn't tax you at all. But it wants its piece of the cake, so it calculates your income tax rate as if you made $100k there and then applies that rate to the $1k you really did make there. The state where you live and made $99k will do the same thing, but it will give you credit for the taxes you paid to the other state. This is where it gets tricky. Say the first state taxes you 5%, so you paid them $50. The state where you live taxes you 7% on that high income of yours, so the tax on that $1k is $70, and you owe them $20 more after the credit.

If the W2 isn't broken out, it doesn't matter because the one state will still give you credit for the taxes paid to the other, and tack on more if its own rate is higher.

Very well explained!!!