double taxed in CA and IL

[coolbean]

Hi everyone,

I had income in CA that was incorrectly withheld from IL tax in 2022. I was withheld $19k to IL, which is $9k more than it should have been. When I filed my CA return, it said I owed $3k to CA. But the strange thing is, after I entered the payment I have made to IL, it says there's still a balance of $1132. This doesn't make any sense. I have paid $9k extra to IL but it doesn't offset the entire $3k balance owed to CA? Aren't I still being double-taxed despite claiming the tax payment credit?

[xmasbaby0]

Please explain where you lived and where you worked.  Or...did you move from one state to the other during the tax year?   It is unclear whether you needed to file part-year returns for each of the states or whether you should have filed a non-resident return for one of them.   When you live in one state and work in another, it is very important for you to prepare the NON-resident state return first so that you get credit from the resident state for the tax paid to the non-resident state.

Provide some details so you can get better help here.

[coolbean]

I lived in IL and moved to CA in Aug 2022. I was working remotely and my company had offices in both states. HR didn't update my work location so my withholding was messed up.

[coolbean]

I am filing for NR for both states

[xmasbaby0]

https://ttlc.intuit.com/questions/1901227-how-do-i-file-a-part-year-state-return

https://ttlc.intuit.com/questions/1901560-how-do-i-file-if-i-moved-to-a-different-state-last-year

https://ttlc.intuit.com/questions/2895983-how-do-i-allocate-split-income-for-a-part-year-state-retur...

[NCperson]

@coolbean sounds like you should be filing as part year resident in both states.  

normally, someone filing Non-resident lived in one state and worked in another, or lived / worked in the same state but had investment property in another state. 

why did you pick 'non-resident' on both states?

[TomD8]

There is no "tax credit" to be claimed unless you physically worked in CA while still an IL resident, or physically worked in IL after becoming a CA resident.

IL can tax what you earned in IL; CA can tax what you earned in CA.  If you allocated your income correctly between the two states, then your tax returns are probably correct. 

Illinois will refund any excess withholdings that your employer paid.    Conversely, if you were under-withheld for California, then you'll have taxes due to California.  Your Illinois refund may or may not cover your entire California tax bill - it'll depend on the actual amounts.    You won't be double-taxed.

 Tip:  Did you deduct your moving expenses on your California return?  A deduction for moving expenses is no longer permitted on your federal return, but California still allows it.

[coolbean]

The thing is, IL did not refund the excess that my employer withheld when I was not working in IL. They require a letter from my employer to refund this but my employer refused to provide it. I'm now trying to claim tax credit with CA to avoid being double-taxed. But according to the calculation (paying $1000 to CA on a wage that's already taxed in IL) I am still being double-taxed.

[Opus 17]

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@coolbean wrote:

The thing is, IL did not refund the excess that my employer withheld when I was not working in IL. They require a letter from my employer to refund this but my employer refused to provide it. I'm now trying to claim tax credit with CA to avoid being double-taxed. But according to the calculation (paying $1000 to CA on a wage that's already taxed in IL) I am still being double-taxed.

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Here's what you should have filed.

It sounds like you were a part-year resident of IL and a part-year resident of CA, if your permanent home was in IL and then you moved to CA.  (To be a non-resident of both states, you would have to have a permanent residence in some third state.)

Your part-year resident IL return will report and pay taxes on all your world-wide income from 1/1/22 to the date you moved (the date you changed your state of permanent residence).  Your part year CA return will report and pay income tax on all your world-wide income you received starting on the date you moved through the end of the year.  If you only had IL withtholding, you should be overpaid to IL and underpaid to CA, so get a refund from IL and owe to CA.

There are no tax credits here for a resident who paid tax in another state, that is only an issue for a non-resident return, and you should not have filed non-resident returns.  You pay only CA tax for the part of the year you lived in CA and only IL tax for the part of the year you lived in IL.

Illinois should not need proof from your employer that you moved, they should only require proof from you that you moved (changed your permanent address).  

I suspect you need to file amended returns with both states.  If you are already in contact with IL, you should call them back, explain your situation, tell them you want to file an amended return as a part-year resident, and see if that will be acceptable to them.

You may need to hire a professional to help straighten this out. 

[TomD8]

@coolbean --

As I said previously, I don't think you need to file amended returns if your original return allocated your income correctly.    I might also mention that neither Illinois nor California have separate tax forms for part-year residents.  CA uses Form 540NR for both non-residents and part-year residents.  Illinois uses Form IL-1040 with Schedule NR in both cases.

I don't think Illinois is disputing the numbers on your returns.  It sounds like they simply want proof that you actually did move to California on the dates you claimed.  Since your employer unfortunately is not willing to help you, my suggestion would be that you appeal the Illinois decision in writing and ask them what forms of proof they will accept in place of an employer letter which you are unable to obtain.  The laws of both states are on your side.

[Opus 17]

@TomD8 

I think we are unclear on what the taxpayer actually filed since the taxpayer is asking about a "credit."  Even if there is no PY form in these states, the IL return should only tax the income allotted to IL and the CA return should only tax the income allotted to CA.  There won't be a credit for NR taxes paid to a different state.   If IL is not releasing the calculated refund because they want proof of a change in residency, that's different from an out of state tax credit. 

I agree that what IL should be asking for is proof of a change in the taxpayer's permanent residence, and its not clear to me that an employer could ever certify that (how does the employer know the taxpayer's intent to change residences?)   There must be some other proof that IL will accept.  

[TomD8]

@Opus 17 --

"There must be some other proof that IL will accept." 

Hence my recommendation in my previous response.

[NCperson]

@coolbean - in this thread did you ever re-confirm why you filed as a non-resident.  that is the root of this issue. 

Given that you lived in IL and then moved to CA, the normal method is to file as a part-year resident in IL and report your IL income there and THEN file as a part-year resident in CA and report your CA income there.  

[coolbean]

Thanks for the reply! I actually own a permanent home in TX and that's why I filed nonresident for both IL and CA. I lived in IL until March 2022 and moved to CA in Aug 2022 (the rest of the year was in TX). 

I received a "Return Correction Notice for Illinois Individual Income Tax" which asks for a letter from my employer that can confirm the income earned in IL. IL doesn't agree with my way of allocating the income because my employer has reported all income on my W2 as earned in IL.

I could ask IL if they can accept other forms of proof that I permanently left IL, but I think it's gonna be a long shot. In that case, I would still need a tax credit from CA.

[NCperson]

@coolbean just becuase you own a permanent home in TX doers not mean that is your residence!  I suspect THAT is causing this mess.

if you were working in IL and then in CA, how was it that TX is a 'permanet home? how often were you in TX during the year?