Non-resident state tax for Maryland

[tikna]

My wife did some freelance work for a LLC in Maryland (we are resident in Colorado and pay taxes here for last few years).

While preparing the state taxes through TurboTax (Premier edition, CD version), the Maryland state form showed our income higher than what we received as compensation. It seems Maryland consider all kinds of income and it was multiplied with a factor to get to this number. So the adjusted gross income comes out to be slightly bigger. My question is why should Maryland state be considering what we earned as part of our Colorado income (salary, stocks, etc.)?

[SundayInSalem]

States are free to create their own laws to tax residents, part-year residents and nonresidents. There is no national state tax system. State taxation, like other laws, vary by state. For example, states treat marijuana differently. If you were caught with marijuana in a state where the drug is illegal you can’t go to court arguing that you should not be penalized because marijuana is legal in your state.

Many states, including Maryland and Colorado, calculate a base tax on total income. Nonresidents and part-year residents then pay tax on the percentage of state income multiplied by the base tax. You are correct—sometimes you pay a higher tax under this method than if your tax rate was figured on your state-only income.

The argument for this method is that you are actually paying your fair share. If you made $10,000 a month ($120,000 total) but only $20,000 in the nonresident state, some will argue that someone who makes $120,000 shouldn’t pay the same tax as a full-year resident who earned $20,000 total for the whole year.

[tikna]

Thanks for the reply.

It does makes sense that the tax rate would be calculated based on total income rather than specific state only income.
I am already paying the taxes for all of the income in my resident state (CO). Luckily Colorado allowed me to credit back some of the MD state tax, it still feels like I paid double taxes on portion of the income that was not earned in MD.

[SundayInSalem · Accepted solution]

You can double check your entries in Maryland to make sure you did not include any income except for your wife's LLC. Line 8 of Form 505NR will show your Maryland income.

Another reason you may feel double taxed is that states only allow a credit up to the state tax rate. Colorado has a flat of 4.55%, whereas Maryland's taxes are graduated. The rate can be as high as 5.75% but CO will only credit up to 4.55%.

[tikna]

Thanks. Your suggestion led me to also double check form 505 for Maryland it seems the income from the LLC is showing up twice, once as wages and once as other income. So it's essentially considering double the amount as Maryland Income.

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