How can I properly attribute business income to two states (full-time resident in one state).

[panda742]

I'm a full-time Maryland resident, using Turbotax Home & Business.  My business is simply a DBA.  I have income from Maryland, but also received a 1099-MISC completing payment for an invoice issued when I lived and worked in Massachusetts.  How do I properly divide this for state tax purposes?

[AmandaR1 · Accepted solution]

If you're a full time resident of one state, that means you didn't live in another state, but I see that you said you lived and worked in MA, as well. I'll explain the two situations.

If your primary resident is Maryland (you lived there all year), but you have business income that was earned in another state (MA), then you'll file two returns. First, a nonresident return for MA reporting only the income earned in that state. Second, a resident return for Maryland, which will claim all of your income, including the income earned in MA (because your resident state lays claim to all). 

However, your resident state will give you credit for taxes paid to another state so that you're essentially not double taxed. For the software to calculate this, you'll need to update the non-resident state first and the resident state last. 

Otherwise, if you lived in two states during the year, then you'd file a part year resident return for each state. MA has an interesting apportionment way of allocating wages, but the software handles it for you and you simply report the amount earned in that state. 

[panda742]

To clarify, I *previously* lived and worked in MA, and was only recently paid the balance for that work.  I was a full-time MD resident in 2016.  I followed your advice, but am uncertain if I got the correct results.

1) The MA return allowed me to apportion business income.  It automatically apportioned business expenses, which was not the desired behavior (since all my expenses this year were in MD), but I was able to manually adjust the taxable amount.

2) The MD return didn't appear to reflect any apportionment.  It considered the whole amount earned as taxable.

3) I end up owing federal taxes, but being owed refunds in both MA and MD.  I admittedly made almost no money in 2016, but this still seems like a suspicious outcome.  Should I ditch the MA return entirely?  My 1099 still lists my business address as Massachusetts, so I'm not sure what to do.  Thank you!

[AmandaR1]

Are you a resident of MA? Your resident state taxes all and gives you credit for taxes paid elsewhere.  MA has a very complicated apportionment calculation.

 The software asks you to confirm the type of state return it selected at the beginning of the questions and you need to chose the return type you need. Make sure you're filing a resident state return for where you lived all year. A part year resident return, in two states, if you lived in 2 states during the year.

Otherwise, if you only earned income by working in a state, then you'll file a non-resident return.  If a business who paid you is located in another state, you do not need to file there; it only matters where you work and live. If you didn't follow the order I explained above in my answer (or you added/changed things to federal taxes, after starting the state), then you need to "Delete" your states and start over.

[panda742]

I'm a resident of MD, and have been for two years.  The income from my DBA was accrued in 2013, when I lived in Massachusetts, but most of it was unpaid--the client finally paid me this year.  I did follow the order you stated, completing the non-resident Massachusetts return, and then the resident Maryland return.  The results are as above.

Given that this leaves me with tax refunds in both states, I'm wondering if I'm less likely to provoke an audit by simply filing everything in Maryland.  Thank you for your continuing help--I really appreciate it.

[AmandaR1]

Edit

[AmandaR1]

Ok, it's considered income in this year - you need to file a non-resident MA return for the income. You need to update your MA return first and then your MD return.

[panda742]

OK, I'll do that.  Thank you!