Question 1: I find the New York rules about "New York sourced income" confusing. Since I was never physically in New York (not even for even a day), do I need to report this as "New York Sourced income" by submitting a non-resident New York tax form, or can I just include it on my Virginia tax return? You are correct. Since you never stepped foot in NY, you do not need to file a NY nonresident return. You will just report that income on your VA home state return.
Question 2: TurboTax (downloaded version) does not appear to change tax allocations between between Virginia and New York regardless of my entries (I was running different scenarios). It continues to show the allocations made in my initial entry (on the "Let's Review Your New York Numbers" page). Is this a program glitch? There are a variety of reasons you may not be seeing a difference. If your New York tax liability was say $1,000 and your VA liability is $800, until you had less than $800 on the NY sourced income, you would not see a difference. So, it likely has to do with your numbers and how it offsets. But, as stated in response to your first question, you do not need to file a NY nonresident return since you have never stepped foot in NY and I am assuming you did not incorporate in NY.
If you did for whatever reason file an LLC in NY or form a company in NY, then you would have to file a NY return. This would not be a common thing.
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