Ga Resident with Alabama nonresident income

[GaGirl55]

Helping my son with his taxes and discovered that his employer (a Georgia company) allocated 97% of his 2021 compensation to AL and paid his withholding to AL.  But he is a full time Georgia resident (owns home in GA) and last year commuted to AL to work on a project there.   His employer only allocated one pay period to GA.

We finished his Federal taxes, Ga State taxes and an Alabama nonresident income return.  While GA gave him a credit for the taxes paid in AL, he still owes quite a bit to GA.  I presume this is because of under-withholding for Georgia.  (he did not notice during the year that his company was taking out AL state taxes.)

When he questioned this with the HR office, the individual said the company "might" be able to issue corrected 2021 W-2 forms and re-allocate all his compensation to Georgia, but she was not sure...  And he would need to file extensions for all the returns while she sees if they could do this.  Bite the bullet and pay Georgia, or see if his company can fix this mess they created?    

Is there a way to do a "what if" Georgia return to see if he is still going to owe Georgia $$ even if his compensation is all allocated to Georgia?   Thanks for your thoughts.

[AnnetteB6]

First, a note about filing extensions for the state returns.  If the Georgia return is showing a balance due, then that balance due is expected to be paid at the time you file an extension.  The extension is for extra time to file, not extra time to pay.  

So, you have to weigh the option of whether to go ahead and file the returns as is and then amend both returns if the employer comes through with the corrected W-2 or whether it is best to file extensions.  Filing the Federal return now should be fine without an extension since the issues are with the state information on the W-2.

If the W-2 is truly incorrect in the allocation of income between the two states, meaning that he did not actually perform work in Alabama for 97% of the year, then filing extensions and waiting for the corrected W-2 is probably your best course of action.  

If you know what the W-2 should be reporting, you can certainly type in the 'correct' values in TurboTax now before filing the returns so that you can see what the outcome should be.  Just be sure to change things back to the actual W-2 values before filing any returns or extensions. 

[TomD8]

It's unlikely that the employer will issue a corrected W-2, because the original W-2 shows what actually happened, and the withheld taxes have no doubt already been deposited with the state.

Your son should file a non-resident AL return reporting the income he earned in AL.

He should file a home state GA return reporting ALL his income and claiming a credit for the AL taxes. 

He will wind up with a refund from AL and a hopefully not very large tax bill from GA (after applying the credit), since the two states have similar tax rates.

In TurboTax, be sure he completes the non-resident AL return before he does the GA return, so that the program can calculate and apply the credit correctly.

[GaGirl55]

Thanks TomD8,  A few follow up Questions.

We paid for the Alabama state download and did the nonresident return already (Form 40NR).  We also did his Georgia resident return on  Turbo tax.  He electronically uploaded his W-2 (by ADP) and which allocated 97% of his income to AL and only 3% to GA.  How would we change this to report ALL his income in GA?   The GA return already pulls his federal gross income and deductions from the federal return.

The total AL withholding is about $6,000, the NR return shows AL tax of $4700 and a refund of only $1344.

I think we did the GA return first, then did the AL return.  So are you saying I should delete these two returns and do the AL nonresident return first? 

[MaryK4]

Since he worked in Alabama, his employer is obligated to withhold Alabama taxes.  Yes, you must do the nonresident return first, but you do not have to delete both returns- just delete the Georgia one and start from the beginning.  You do not allocate the income to Georgia in this situation, you will have to report all income to Georgia and apply the credit for tax paid to another state on the resident Georgia return.  @GaGirl55 

[GaGirl55]

I re-entered the state returns and did the Alabama non-resident return first.  Then did the GA resident return and there was a negligible change.   He still owes a lot to the State of Georgia and is assessed with a penalty for underpayment.    In both scenarios, GA recognized a credit for the taxes paid in Alabama, but Georgia also reduced the federal itemized deduction by almost $4300 apparently based on taxes paid in AL???

[RaifH]

The net result should be a large refund from Alabama and a large tax due to Georgia. The most important thing is to only allocate the income he earned in Alabama on the nonresident Alabama return, in spite of what the W-2 says. Georgia, as his resident state, taxes all the income he earned during the year. He should be getting a credit on his Georgia return for the taxes he paid to Alabama, so it sounds like you are doing everything correctly now. 

There is a federal itemized deduction for state income taxes paid during 2021. Even if he gets a refund from Alabama for what he paid to them, he still paid those taxes in 2021. The federal itemized deduction should not be impacted by this. If he does itemize this year, his refund from Alabama will have to be entered on next year's tax return and may be taxable. 

[GaGirl55]

If he reallocated the income on his return instead of using the amounts reflected in Box 16 of the W-2, won't that trigger an audit?   The employer is not going to issue a new W-2.   

[TomD8 · Accepted solution]

Reallocating his AL income to reflect his days actually worked in AL isn’t cheating.  It reflects the reality of his situation and follows the tax law.  Some people in his situation print and mail their return, along with a letter of explanation.