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?
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.
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 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?
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.
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.
@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.
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.
@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.
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.
@Opus 17 --
"There must be some other proof that IL will accept."
Hence my recommendation in my previous response.
@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.
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.
@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?
"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). "
That may change things considerably. You need to become familiar with the idea of domicile. Domicile is your one real permanent home. You only have one domicile at a time. You remain domiciled in one place until you take active steps to establish a new domicile and abandon the prior domicile. Even though you owned a house in Texas, your domicile could be in Illinois, depending on the totality of the circumstances.
Even if your domicile in is Texas, many states have a statutory resident rule. That means that even if you are domiciled in one state, you are considered a resident of another state for tax purposes if you live in that state long enough. I am not an expert on Illinois but I briefly reviewed the Illinois law, and it says that you are a resident if you live in the state the entire year (even if you are domiciled elsewhere), and if you were a resident one year, you are a resident the next year if you lived in Illinois more days than you lived in any other state.
https://ilga.gov/commission/jcar/admincode/086/086001000J30200R.html
You certainly should have filed your California return as a part-year resident and not a non-resident, since you changed your domicile. But as @TomD8 noted, California uses form 540NR for part-year residents, so just knowing which form you used doesn't tell us what you declared as your residency status.
You need to determine how you should have filed in Illinois based on their laws and regulations. Even if you had a home in Texas, you might have been an Illinois resident for tax purposes. Then, after determining if you were a resident, non-resident or part year resident, you will need to figure out what proof the state will accept.
You may benefit from professional assistance.
@coolbean wrote: "I would still need a tax credit from CA."
Did you have Illinois-source income after you moved to California? If you did not, then you are not due any tax credit from CA. CA will only grant a credit if you have income that is legitimately taxed by both CA and another state.
If your employer mistakenly withheld IL taxes after you became a CA resident even though you no longer lived or worked in Illinois, then no credit is due. Your only remedy is to obtain a refund of the incorrectly withheld taxes from Illinois. CA will not give you a tax credit for a mistake made by your employer.
"Did you have Illinois-source income after you moved to California?" I did not, but my employer didn't update my work location so officially both my w2 and IL revenue department think I did. Both IL and CA are taxing this income. Therefore, I think I am due tax credit from CA.
I cannot obtain a refund from IL without my employer providing the letter. Are you saying there's nothing I can do about being double-taxed?
have you asked your employer for a corrected w-2 or letter? without either, Illinois will do nothing.
@coolbean --
Yes, your employer withheld Illinois taxes after you became a California resident, but that was a mistake on their part. Technically and legally, per the laws of both states, you had no Illinois-taxable income after you became a California resident. Therefore, you have no income that was legitimately taxed by both states, and you are not entitled to an "other state" tax credit from California.
As I said before, your only remedy in this situation is to seek a refund of the incorrectly withheld taxes from the state of Illinois. If Illinois is requesting a letter from your employer in order to issue a refund, then it appears the issue is between you and your employer.
I understand my employer is the one making the mistake. But the HRs at my company refuse to help me. Do I need to consult a lawyer in order to get my refund back?
one other avenue to try before seeking legal advice. The IRS.
this is from form 4952
• If you don’t receive the missing or corrected form from your employer or payer by the end of February, you may call the IRS at
800-829-1040 for assistance. You must provide your name, address (including ZIP code), phone number, social security number, and dates of
employment. You must also provide your employer’s or payer’s name, address (including ZIP code), and phone number. The IRS will contact
your employer or payer and request the missing form. The IRS will also send you a Form 4852. If you don’t receive the missing form in
sufficient time to file your income tax return timely, you may use the Form 4852 that the IRS sent you to file with your return.
The IRS has nothing to do with this. The W-2 is correct. It shows the withholding that was actually collected during 2022. It can't be changed retroactively. The fact that the employer should have stopped the Illinois withholding and switched to California withholding doesn't change the fact that the W-2 accurately shows what really did happen.
The problem here is that Illinois (seemingly, remember, we can't see the taxpayer's letters or hear the phone calls) wants the employer to certify that the employee moved. This seems to me to be the wrong demand. The employer has no say over where the employee lives, as long as the employee completes their duties. The employee could have lived in Indiana or Michigan while working in Illinois, and the employee could be living in Arizona or Nevada right now and just commuting a really long way to their current job in California. The state of Illinois should be asking the employee to prove where they live, and that they changed their permanent residency (their domicile), not asking the employer to ratify it.
Some additional dialog needs to happen between the taxpayer and the examiners in Illinois. It may be time to get a professional involved, although whether an attorney or an accountant would be better, I can't say.
@coolbean --
Here's a link to a document from the Illinois State Bar Association. The link discusses the issue of how to prove non-residency in Illinois.
Personally, I think a copy of your part-year resident California tax return, including Schedule CA (540NR), might be helpful in proving your case, since it includes the date you became a California resident and it documents that you paid CA taxes from that date.