Apportioning income when employer did not change state status

[CSmith32]

I am active duty military and have my permanent residence in NH.  My wife is a civilian federal employee, and we have chosen to file jointly for the past few years.  We lived in MA for the first 180 days of 2019 and then moved to MD for the remainder of the year.  Normally when filing taxes, I complete our federal return jointly using the desktop software and then download a state return to complete her state taxes separately so that my income does not get combined into hers.  This method has worked well for MA. 

So now, she has been working for the same federal institution located in MA the whole year but went to full-time telework after we arrived in MD on July 1st, 2019.  When we received her W-2, it turns out that her employer never switched her state of residence and continued allowing her income to be taxed by MA for the whole year. 

In other words, MA has received 100% of her state taxes for 2019 and MD has received 0% of her state taxes despite the fact that she physically lived in MD for a little more than half the year.

My question is how do we handle this situation?  Can we essentially pay MD taxes for 185 days and then get a refund from MA?  If so, how do we indicate to MA that we overpaid in taxes?

I greatly appreciate any insight, thank you!

-Carl

[TomD8]

According to Section 302 of the Veterans Benefits and Transitions Act (VBTA) of 2018,  the spouse of an active duty Servicemember can elect to have the same residence for state and local tax purposes as the
Servicemember.    In other words, if a Servicemember is a legal resident of a particular state for tax purposes, the spouse can unilaterally elect to also be a resident of that same state, even if he/she has never lived there.  The law went into effect starting with tax year 2018.

https://www.congress.gov/bill/115th-congress/senate-bill/2248/text

Therefore, for state tax purposes your wife may elect to be a resident of your SLR of New Hampshire, thus relieving her of the obligation to file a tax return in either MA or MD.

She should file Form M-4-MS with her Massachusetts employer, certifying that she is exempt from MA withholding: https://www.mass.gov/doc/form-m-4-ms-annual-withholding-tax-exemption-certificate-for-nonresident-mi...

The similar form for Maryland is MW507M:   https://www.marylandtaxes.gov/forms/20_forms/MW507M.pdf

In order to obtain a refund of the withheld MA taxes, she must file a non-resident MA tax return, showing zero MA income.   The return should be printed and mailed, because of the likelihood that an e-filed return will be rejected because of the W-2 discrepancy.

[CSmith32]

Thank you very much, we were not aware of the 2018 amendment that allows my spouse to file in my state of residence even though she is not a legal resident in that state.

-Carl

[CSmith32]

One follow-up to Maryland taxes with respect to Section 302 of the 2018 VBTA.

The MW507M states that "If you check 'NO' to any of the statements, you are not eligible for the withholding exemption," and has the spouse state "I am domiciled in a state other than Maryland."

Because my spouse is technically a resident of MD, she would have to answer "NO" to that statement, correct?  And, if she answers "NO," then she is not eligible for the withholding exemption.

Any thoughts on how to proceed?  Should we just allow MD to withhold her taxes and then claim a refund every year?

[TomD8]

I can't find a specific answer to your question on the MD tax website, but in my opinion if you are still on active duty, and assuming your SLR is still NH, by federal law (the VBTA Act of 2018), your non-military spouse may clam NH as her state of residence or domicile for tax purposes.  Therefore she may legitimately answer Yes to question 1c on MD Form MW507M. 

Section 302 (b) of the VBTA states that the spouse may elect to use the servicemember's state of residence for tax purposes "with respect to any return of state or local income tax for any taxable year" following the passage of the act.

https://www.congress.gov/bill/115th-congress/senate-bill/2248/text