Do I owe Nebraska tax for income earned in another state as part-time resident?

[Hluo]

I worked in Iowa all year in 2017.  I lived in Nebraska during the beginning of the year (while earning income in Iowa) then moved to Iowa from June to December.  According the Nebraska Schedule III, I should only owe tax on wages from Nebraska sources as a part-time resident.  Last year as a full time resident I was able to get credit for taxes paid to Iowa, but won't be able to claim any credit for taxes paid this year since I'm only a part-time resident.  My employer still gave me 2 state W2's.  One for Iowa (100% wages) and Nebraska (50% wages). The Nebraska W2 has wages earned in Iowa as a Nebraska resident.  

Do I owe Nebraska any tax since I did not earn any Nebraska-source income while a resident of Nebraska.  

Will NE still come after me since my W2 has wages reported to NE?

[DS30]

It depends -

Since the NE filing instructions state that you do not need to include income taxed in another state on your part-year resident state income tax return, then just file a part-year NE resident return but include $0 NE sourced income. (This way you can get back any withholdings.)

You must mail in this NE nonresident state income tax return and include your state W-2 information. You will want to include an explanatory statement with your NE return stating your situation (that your only income while a part-year resident of NE was IA-sourced income taxed in IA.)

[Hluo]

Thank you for your detailed answer. However, I cannot claim any credit for taxes paid to another state at a part-year resident. NE schedule II can only be claimed by full year residents. NE Schedule III state that I should only be taxed on NE source income while a part-year resident. If I put my IA-source income as wages that need to to be taxed in NE I will be double taxed since I cannot claim credit for this tax on my Iowa return as I was not living in Iowa for that portion of income. Please help!

[Hluo]

NE Schedule II-Credit for tax paid to another state “Complete this schedule if you were a Nebraska resident the entire year and are claiming credit for income tax paid to another state, political subdivision, or the District of Columbia. Partial-year residents, even though having established residency as of December
31, 2002, must use Nebraska Schedule III.”

NE Schedule III Part-Year Residents “Enter the income derived from Nebraska sources, or attach a schedule with the sources and amounts of income and deductions, characterized as they were on the federal return. Nebraska income for a partial-year resident includes all items of Nebraska income for a nonresident plus all of the income earned while a Nebraska resident that is not taxed by another state.”

[DS30]

Actually you will be claiming a credit on your IA part-year tax return for the state income taxes paid on the IA income that was taxed in NE. So report the full amount of IA earnings on your p/y IA return, then claim a tax credit from NE on your IA return. I have updated my answer. Sorry for any confusion.

[Hluo]

According to IA 130 "Iowa Out-of-State Tax Credit Schedule" - Part-year residents of Iowa may claim this credit only if any income earned while an Iowa resident was also taxed by another state, local jurisdiction, or foreign country. Technically this income that is taxed by NE was earned as a resident of NE and not IA. I was audited by IA IRS for this back in 2012 because my tax preparer claimed this credit on my IA return when indeed I did not live in IA making this income and cannot claim credit for it.

[DS30]

But was your tax preparer claiming the amount of IA sourced income earned in NE on your IA part year return?

[Hluo]

Yes, he claimed this IA sourced income earned in NE on my IA part-year return and IA IRS audited it. Since I was not living in Iowa, I cannot claim tax paid to NE (since I was living in NE).  I ended up getting double taxed that year, which I believe was a mistake.

[Hluo]

I truly believe I do not owe NE any taxes because as a part-year resident, I should only owe tax on NE-sourced income and there was $0 earned from NE sources.  

[NE Schedule III Part-Year Residents: Enter the income derived from Nebraska sources, or attach a schedule with the sources and amounts of income and deductions, characterized as they were on the federal return. Nebraska income for a partial-year resident includes all items of Nebraska income for a nonresident plus all of the income earned while a Nebraska resident that is not taxed by another state.]

According to this instruction:
Nebraska income for a partial-year resident includes all items of Nebraska income (ZERO INCOME) for a nonresident plus all of the income earned while a Nebraska resident that is not taxed by another state (NOT APPLICABLE - INCOME WAS TAXED BY IOWA)

[Hluo]

If I file as you have suggested above with no credit on either returns I will owe NE taxes on 50% of my Iowa-sourced income and will owe Iowa tax on 100% of Iowa-sourced income.  This would mean double taxation.

[Hluo]

NE only allows full-year residents to claim credit for taxes paid to other states because they are entitled to taxes on all income earned by a full-year resident. I assumed most states allow credit for part-year residents but I think NE is a little different.  They eliminated this credit for part-year residents by simplifying it to only paying taxes on NE source income as written above.  I will have to contact NE Dept of Revenue to straighten this out.

[DS30]

After a further detailed review of your situation and the NE instructions, the best option is to file an NE return (if you have withholdings and you want a refund) but $0 NE sourced income. You will have to mail this return to the NE DoR and include your W-2 and explanatory statement regarding your situation. Or you can just not file an NE return and if the NE DoR has an issue, then explain your situation. I revised my answer.

[hulk1]

I am in a similar situation. Any updates regarding that? Did you contact the NE Dept of Revenue and, if so, what did they say?

[MarilynG]

Are you a Part Year Resident of Nebraska, or a Non-Resident with NE Income?

Most states only tax income earned in their state (unless you are a resident; then they tax all your income).  In this case, they give a credit for tax paid to another state. 

As you go through a state interview, you are presented with Federal Income and asked to allocate an amount to that state (if this was not on your W-2, or incorrect on your W-2, or for self-employment, for example). 

Here's info on how to file a Part-Year Resident Return and How to File a Non-Resident State Return.

This link has more detail on Allocating Income as a Part-Year Resident

. 

@hulk1