Confusion with W-2s for multiple states

[snoqualmie7]

Greetings everyone! I have a confusing situation I don't see addressed here yet, so I thought I'd ask for help.

In 2022, I worked remotely full-time from my home in Virginia as an employee for a consulting agency. I am "assigned" to the company's nearest office to me which is in Maryland (but I never went in to that office in 2022).

I received three W-2s from my company; they each have tax data as follows:

1. Virginia W-2 (completely filled out)
   Box 16 shows an amount = 100% of my wages from box 1;
   Box 17 shows zero state tax paid
2. Maryland W-2 (only boxes 15-17 filled out)
   Box 16 shows an amount ≈ 99% of my wages from box 1;
   Box 17 shows state tax paid of ≈7.2% of the amount in Box 16.
3. Massachussetts (?!) W-2 (only boxes 15-17 filled out)
   Box 16 shows amount ≈ 0.5% of my wages from box 1;
   Box 17 shows state tax paid of ≈ 2.5% of the amount in Box 16.

What's the best way to handle this? My main concern is it seems like this W-2 is saying I earned ~ 100% of salary in both VA & MD, making me subject to tax on 2x my salary. For its part, TurboTax pulled in this W-2 directly, lists each state's data on a separate line, and says I owe thousands of dollars to Virginia (since that W-2 shows no state tax paid) with no mention of MD or MA.

Really confused by this...thanks in advance for any advice! 🙏🏼
—snoqualmie17

[MaryK4 · Accepted solution]

Maryland and Virginia have a reciprocity agreement so if you are a resident of one state and work in the other you only have to pay and report taxes in your resident state.  Because the company is in Maryland they withheld for Maryland (I assume).  You should contact HR and ask them for the form so that you can change that to Virginia for 2023.  For 2022 you can file a Maryland nonresident return and report zero Maryland wages to get the withholding refunded, and then file your Virginia return reporting the income.  Did you work in Massachusetts at all?  It seems they allocated some wages to Massachusetts- you would have to file a Massachusetts nonresident return and you would be able to get a credit on your Virginia tax return for the taxes paid to another state.

In TurboTax, it is recommended that you file the nonresident tax returns first so that you will have the credit amount to apply in Virginia.

[snoqualmie7]

Thanks SO MUCH much for that detailed answer @MaryK4, that was incredibly helpful! I've got this setup in TurboTax now, with a separate Maryland nonresident return (with zero MD wages.)

Great news: Maryland's state taxes are apparently higher than Virginia's, so the credit from Maryland is greater than what I owe to Virginia, which means I'll actually get a sizable refund from this (I'd have been pretty frustrated if that had gone the other way!)

Not so great news: TurboTax indicates I owe an underpayment penalty to Virginia (stands to reason, since my company sent zero state tax to VA this year).  Thankfully it's only about 20% of the net refund I'll get after I apply the MD credit to my VA taxes. Any way around that penalty?
Also, it looks like I'll also have to pay TurboTax the filing fee for an additional state. Again, not a dealbreaker, but definitely incentive to get this ironed out before next year.

Final question: in my MD state return, TT asks: 

We noticed that you have no Maryland source income even though you have taxes withheld on your Maryland return. If taxes were withheld in error, check the box below.

I'm guessing I should check that box, correct?

Thanks so much again for your help, really appreciate it (do you have a tip jar? 😎)

[MaryK4]

I would send an email to Individuals and ask if you could get an abatement of the penalty because your employer withheld for the wrong state.  (It's worth a shot.)

Yes you will want to check the box that Maryland taxes were withheld in error. 

@snoqualmie7 

[snoqualmie7]

Sounds good...thanks for the additional advice!

[snoqualmie7]

Hi @MaryK4, thanks again for your help on this last year. Wanted to reach back out to you: I have a follow-up question was wondering if you could help with. I'm working on my 2023 taxes now, and when I enter the info regarding the refund I received for the erroneous Maryland taxes, TurboTax tells me that "part of your refund is taxable." 

Is that correct? It seems weird to me, since those taxes were an error and I was entitled to a full refund of those taxes, but maybe it's not that simple? I'd appreciate any insight you have on this.

Thanks in advance!
sno7

[JohnB5677]

It may be taxable.  If you Intermixed your deductions in 2022, you took the full amount of all state withholdings as a deduction on your 2022 tax return. 

If you got a refund for your state taxes, and had deducted them on your 2022 tax return, they may be taxable.  Turbotax will do the math for you.