Living in IL (Chicago) but working remotely for a company in NYC. Double taxation?

[minivatreni]

I am working for a NYC based company, and they allowed me to work remotely, so I moved to Chicago in April 2023. I've been living in Chicago ever since.

I know that NY is one of the few states that taxes remote workers. I read online however that if you are subject to the convenience of the employer rule, you are double-taxed, because IL will not give you a credit for your remote work actually performed in IL.

But then I saw Illinois will allow you an "other state credit" for the taxes you pay to a non-resident state on dollars that are also taxed by Illinois, because the Supreme Court has ruled that it is unconstitutional for states to fail to provide credit for taxes paid to other states. (Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015)). The ruling in effect outlaws double taxation by states.

I am confused because I am seeing opposite answers... Does IL give you a credit for taxes paid via NY's convenience rule, or will I just have to pay taxes in both states?

[TomD8]

Yes, Illinois will allow you an "other state credit" for the taxes you pay to a non-resident state on dollars that are also taxed by Illinois.

The Supreme Court has ruled that it is unconstitutional for states to fail to provide credit for taxes paid to other states.  (Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015))

The ruling in effect outlaws double taxation by states.

[minivatreni]

I read online however that if you are subject to the convenience of the employer rule, you are double-taxed, because IL will not give you a credit for your remote work actually performed in IL... 

[TomD8 · Accepted solution]

From the Illinois Schedule CR instructions:

"Taxes that qualify for the credit are income taxes you paid to another state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States, or to a political subdivision (e.g., county, city, local) of one of these jurisdictions."

Also:

"A part-year resident may only take a credit on income earned while a resident of Illinois."

Thus the only qualifiers are that 1) you earn the income as a resident of Illinois; and 2) that you pay income tax on it to another state as well as to Illinois.

[minivatreni]

Agreed. However in the instructions for column b, you are to put the non-Illinois income “as determined using Illinois’ rules for sourcing income.” NY is unique with the convenience of the employer rule which IL doesn’t have. So following that direction, none of my wages go in column b, and at the end, I get no credit. 

[TomD8]

Did you complete your NY tax return before you did the Illinois return, as per this TT help reference?  The sequence in which you complete the returns is critical.

How do I file a part-year state return? (intuit.com) 

Follow the instructions in this previous TT Q&A when you enter your NY income.  Your NY income includes the income you earned working remotely from Illinois.

How to enter New York State income as a part-year resident in TurboTax (intuit.com)

I think this should result in the program itself entering your remotely-earned NY income on Line 1. Column B, of your Illinois Schedule CR.

[minivatreni]

I am technically not eligible for credit from IL for taxes paid to NY-state because the income was sourced within the state of IL, and I did not physically travel to NY to earn that income. And then IL will not grant a resident credit for taxes paid under the convenience of the employer rule, because it views the income as IL-source and the other state as having an invalid tax claim.

Everyone I know has been filing for the credit anyway and getting it anyway because IL state is not catching it. I spoke to a guy who helped lobby to change some IL tax laws, and he said most tax accountants would actually get this wrong if they filed your taxes because they would also request the credit and chances are it'll go through.

[TomD8]

"And then IL will not grant a resident credit for taxes paid under the convenience of the employer rule, because it views the income as IL-source and the other state as having an invalid tax claim."

Can you cite an official source for that statement?

IMO, all that is required for a taxpayer to be eligible for the credit is that the income is taxed by two states (as per the Supreme Court ruling).

And, for what it's worth, NY's "convenience" rule has been challenged in court - unsuccessfully.

https://law.justia.com/cases/new-york/court-of-appeals/2003/2003-18774.html

[minivatreni]

It says to be eligible for the credit, you are to put the non-Illinois income “as determined using Illinois’ rules for sourcing income.” So I believe it is a nuanced situation. 

I am still trying to find what are Illinois’ rules for sourcing income, but as far as I know, the income has to be sourced within NY-state itself to be eligible for the credit. 

[TomD8]

Here is how NY determines whether or not remotely-earned income is New York-sourced:

TSB-M-06(5)I:(5/06):New York Tax Treatment of Nonresidents and Part-Year Residents Application of th...

[minivatreni]

Thanks, but I am still trying to find what are Illinois’ rules for sourcing income, not NY

[TomD8]

Illinois' sourcing rule is irrelevant to Illinois residents, because Illinois residents are taxed by Illinois on all their income, regardless of its source.

New York non-residents are taxed by New York on New York-sourced income.  By New York's convenience of the employer rule, your remotely-earned income is considered New York-sourced and thus taxable by New York..

Therefore the income you earned remotely after moving to Illinois is taxable by both states, making you eligible for an "other-state credit" per to the 2015 U.S. Supreme Court ruling.

[minivatreni]

Sorry to be a bother. I understand what you're saying, however, the instructions state: "In Column B for each line, include only the portion of an amount included in Column A of that line that is non-Illinois income or deduction, as determined using Illinois’ rules for sourcing income." 

So, ultimately the instructions indicate that Illinois' sourcing rule is relevant here. It's saying that there are conditions under which income would be eligible, under their rules for sourcing income. I want to know if I am eligible because the income is actually being sourced in Illinois. Most of the people that file a CR, live in IL, and then physically go to another state to work for the day or week and then travel back. This is not the case for me. I cannot find Illinois’ rules for sourcing income anywhere, which the IL-1040 Schedule CR Instructions are referring to.