1098T Question for an out of state school?

[rosejoee]

My daughter is on a partial scholarship that exceeds her tuition and expenses at an out of state school.  She has 20K in scholarship money in box 5 and 14k in tution in box 1.  She has approximately $1500 in other qualified expenses books, lab equipment etc.  As I understand it my daughter has about $4,500 of taxable income.  I seem to have the federal figured out but the state tax has me puzzled.  She goes to school in Arizona and we live in Michigan.  She earned 2K last year working in Michigan during the summer and the only income she made in AZ would be her scholarship money that is taxable.  When we do her state taxes TT pulls her federal AGI into the Michigan State tax, and she has to pay Michigan State tax, but to me the scholarship money wasn't earned in Michigan so should I manually edit the AGI in the Michigan return to remove the scholarship income then file an AZ state tax for the scholarship money? Or what is the right way to handle this situation?   

Thanks         

[DianeC958]

Yes, you are correct that the income from her scholarship is not taxable in Michigan.  The amount from her scholarship is taxable to Arizona.

When you are filing more than one state it is important to file the non-resident state first and then the resident state last.

By doing this as you go through the state sections you will see income allocation worksheet to indicate the amount of income taxable to each state.

Multiple States-Where to File

[rosejoee]

Thanks for the confirmation @DianeC958.  I have one additional question now that I've looked at the Michigan and Arizona forms.  She earned $2,080 in michigan and $4,501 of taxable scholarship money in AZ.  Should I go to the forms section of the Michigan 1040 and override the AGI from the federal and make it $2,080?  If I do that do I need to do anything else to make sure the rest of my Michigan return is right?  Since the AZ form should be easy I just plan to download the AZ  140NR and add the $4,501 as wages earned in AZ.  If I do that since its lower then the taxable threshold in AZ I believe I will own now tax in AZ.  Should I still complete the AZ form and mail it in?  Last question do I need to change anything on my federal to indicate that some of her income was earned in Michigan from her summer job ($2,080) and then some was earned in AZ (scholarship) or will TT just take care of it?  Earlier why did you say I need to file AZ first?  I plan to mail Michigan and AZ since they are both for small amounts and its seems to be  waste to pay to e-file them. 

Thanks  

[KrisD15]

Michigan taxes their residents on all their income, no matter where it is earned. It is correct to pull the entire AGI amount to the Michigan state return. Now, IF she pays Arizona tax on that income, the Michigan State return will give her credit for the tax paid to Arizona. If she is under the filing requirement for Arizona, and no tax was withheld (which it shouldn't have been since it was a scholarship) she does not need to file an Arizona return. She will be taxed by Michigan on all her income. 

No, the Federal return does not care about which state the income was earned in, so there is nothing that needs to be adjusted on the federal return for that.