Part year resident reciprocity wages

[JConnorIII]

Dear turbotax,

Hello, my name is [PII removed], and I work as an assistant to a financial advisor and we do quite a few of our (simpler) clients taxes for them.  Most things are simple for us.  But one thing that even after 5 years of doing this we still cannot get a grasp on.

For a handful of our clients who either moved from Ohio to Indiana, or vice versa, during the middle of the year; OR lived the whole year in Indiana yet worked in Ohio, all have really weird state taxes.  Due to how turbotax words the reciprocity questions on these two states in particular, it FEELS like they are being double taxed on their w2 income.  Quick example: client I'm currently working on has box 1 income of approx. 67.5k, yet their box 16 income is 77.5k between the two states.  

Within turbotax for Ohio and Indiana in particular it states you cannot claim any double taxed income if state taxes were withheld for the other state.  Due to the box 16 values though this is very strange.  We've been dealing with this for years and I would desperately desire a clear answer on how to fix this for future years.

[DianeW777]

The difference in the income between box 1 and box 16 strictly depends on the state tax law (and possibly by the state where they work). It appears that Ohio and Indiana both follow federal law in regards to 401(k) contributions as example.  This indicates that generally the federal wages (box 1) should equal the state wages (box 16) on the W-2.

Employers use the state wage box based on what actions were taken for withholding, meaning they may have used a higher number than they should have for withholding, and therefore entered the total wages they used to determine withholding for that state. This doesn't mean the wage number is correct for a particular state.  You must figure out what wages should be taxed to each state and appropriately enter that into the state wage box on the W-2.  This can be easily accomplished by the pay check stubs of the employee.

Indiana and Ohio have reciprocity agreements. Only the resident state taxes the income.  Any withholding paid to the nonresident state will be fully refunded.

• If they are full year residents of one of those states, then there is reciprocity.  The nonresident state will not tax anything and a full refund will be received.  The resident state will tax all the income.

For part year residents, they would pay tax only on the wages earned during their residency for each resident state.

Please update here if you have more questions and one of our tax experts will help you.

[JConnorIII]

Some are nonresidents.  Some are part year residents of both states.   The person in particular is a part year resident of both.  

But to also clarify this, we are not the client's accounting department.  We just do their taxes and handle their retirement accounts.  We are not who generates their W2 into turbotax, only who inputs what their tax documents are for their 1040.

The reason I specifically typed this out into a forum is that this is a consistent issue with clients who are part year residents between Indiana & Ohio, or lived in one and worked in the other.   Where their employer does some really funky math in regards to box 16.  Where the total of box 16 is substantially higher than box 1.

I gave the example here of box 1 being 67.5k, and the box 16 total between OH & IN is 77.5k.  Box 12 has codes AA (roth contr), and DD (employer spon health plan), which both total to $3,280.   They have a retirement plan at work (kinda obviously), and nothing else outside boxes 1-6 and 16-20.   

Why is it that I have had returns like this in regards to Ohio and Michigan, Ohio and Pennsylvania, and Ohio and Kentucky and the box 16 numbers reconcile.  But specifically for Ohio and Indiana I get numbers that are saying their box 16 income is anywhere from 10k-30k higher than what they actually earned?  I don't understand why doing state taxes specifically for this pair of states is so hard for employers to code correctly?

[MarilynG]

There are other states that report the Box 16 wages incorrectly too.  If the taxpayer lived part-year in two states, they can Allocate their income according to the time lived in each state and change the amounts that TurboTax pulled incorrectly from the W-2 in the state interviews.