Capital gains in one state when residing in another.

[vankurtz]

I live in New York and had some farm land in Indiana. In 2023, I sold the land in Indiana, and thus paid a capital gains tax on my federal return and the Indiana return (nonresident).

I completed the Indiana tax forms first and included the capital gains on the Indiana tax.

When I started the New York taxes, TT asked how much of each income source was taxed in Indiana. In the page that showed the capital gains, the New York Total was $123,456 (which TT is taking from the federal form) and the Portion Taxed by Indiana was $123,456. The question asked whether the Indiana amount was correct, which it was. Therefore, I left the Amount if Different box empty. Is this correct?

Yet, the New York line for gains (Line 7 on form IT-201) still shows $123,456.

Is this a bug, or am I doing something wrong?

Thanks.

[MayaD · Accepted solution]

No, it is correct. 

Your capital gain is taxable in Indiana because it it considered Indiana source income and in NY your state or residence. As a resident, you pay state tax (and city tax if a New York City or Yonkers resident) on all your income no matter where it is earned.

However, on NY state, you can claim credit for taxes paid to another state. This credit is allowable only for the portion of the tax that applies to income sourced to and taxed by the other taxing authority (state, a local government within another state, the District of Columbia, or a Canadian province) while you were a New York State resident.

Income Received from Indiana Sources

ny.gov

[vankurtz]

Thanks. I would think that TurboTax would point this out and display a question asking me if I want to deduct it from my NY taxes.

[vankurtz]

I understand what you are saying, but I cannot figure out where to enter the credit for the taxes, specifically the capital gains tax, that I paid in Indiana. TurboTax handles the normal income that I made by leasing the land, but does not handle the capital gains. What do I need to do, specifically on what EasyStep screen or on what form?

Thanks.

[AmyC]

Follow these steps:

1. Open your return to NY state
2. Proceed to You Just Finished Your NY Return
3. Locate Credits and Other Taxes Section, start
4. Scroll down to credit section and select Taxes Paid to Another State. 
5. Continue
6. Use dropdown box to select state, continue
7. Enter portion of NY income taxed by IN in the boxes, continue through entering correct amounts
8. Tax computed on your IN return, enter the tax liability shown on your IN return, continue. (Look at your IT-40NPR, line 11)
9. Enter IN information, enter amount paid by you, on your behalf, continue
10. Enter IN information, enter tax withheld, refund, balance due, continue
11. Credit for tax paid is shown. Do you want to attach return? I recommend answering yes here.
12. Done

Let me explain how NY taxes. For a resident, he state adds up all income from everywhere and determines the tax liability on that amount. Then it gives credit for tax paid to other states on the same income. You can look at IT 201 line 38 and see your full taxable income with tax liability below it. Line 41 shows IT 112R credit with the amount you just entered. It is subtracted from your tax liability.

[vankurtz]

I followed your instructions but get the same result. THEN I reread your explanation. Maybe I am confused. 

You said that NY adds up all the income and THEN calculates the tax on that amount. AND then subtracts the taxes paid to Indiana. Assuming that is true....

Suppose the tax rate in Indiana is 3% and the tax rate in NY is 6%. Suppose the capital gains is $100,000. Thus, the Indiana tax would be $3000 and the NY tax would be $6000. Subtracting Indiana tax from the NY tax means that I would still have to pay $3000 in NY in addition to the $3000 paid to Indiana. Is this correct?

If so, I do not understand why I have to pay taxes in NY on an income source that is solely within Indiana. In other words, I would think that NY should subtract the $100,000 from the Federal adjusted income BEFORE it figures the tax, NOT after.

Please clarify.

Thanks,

Van

[DianeW777]

Yes, you are correct. The reason you must pay tax on the sale for your New York (NY) return is because all of your worldwide income must be reported to your resident state.  Hopefully the following will clarify a little more.

The credit for tax paid to another state on the same income will be the lesser of:

1. the tax liability actually charged by the nonresident state, OR
2. the tax liability that would have been charged by your resident state

Since your resident state has a higher tax, you will pay the tax calculated for your state, however they will allow that subtraction for the amount you paid to the state where the land sale was situated (Indiana in your case).

@vankurtz