How does TurboTax determine what income is included in "out-of-state income that is subject to tax in both states" (Ref. MI-1040, Line 18)?

[JimO2]

I am Michigan full year resident; my wife is Colorado full year resident. I cannot determine what income TurboTax uses to calculate the out-of-state income that is subject to tax in both states for the Michigan tax credit.

[TomD8]

According to the Michigan tax instructions, line 18 should show "only income tax paid to another government unit(s) on income earned while you were a Michigan resident and taxed by Michigan."

https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/Forms/2021-IIT-Forms/Book-1040-Instruc...

Did you (the Michigan resident) have any income that was taxed by another state?  If not, line 18 should be zero.

[JimO2]

Thank you for your response. But my issue is what types of income TurboTax uses to determine "out-of-state income that is subject to taxes by both states." It comes up with a six figure that is well beyond any income of that type we earned. My wife is a full time Colorado resident and her entire income was earned there.  I am a resident of Michigan and only had some investment income that was attributable to Colorado and was taxed there. Nothing close to the six figure TurboTax comes up with. There seems to be a glitch in the program. TurboTax shows a refund from Michigan of all the taxes I paid into the state in 2021. I'd love to take it if TurboTax's calculations are correct, but I suspect something is amiss.

[JimO2]

I forgot to add that I am retired and receive a pension that Colorado includes on taxing, but gives a small exclusion to.  They then calculate a percentage (Colorado MAGI divided by Fed MAGI) that they apply to taxes owed which reduces the amount of Colorado taxes actually owed.  But there is no figure within the TurboTax worksheets for Colorado that equals what they use for calculating the Michigan tax credit.

Sorry for the confusion.

[TomD8]

Are you (the Michigan resident) sure you have income taxable by Colorado?

If you're a full-year Michigan resident your pension income is taxable only by Michigan.  It is not Colorado income.  By federal law, retirement is taxable only by your state of residence at the time you receive it, regardless of where you actually earned it.

Also, what is the nature of your "investment income attributable to Colorado"?

[NCperson]

@JimO2 - TT does not determine which income is taxed in which state - the state tax laws do.

but depending on how the state calculates tax, it may look a lot different when comparing two states' approaches

Some states determine the tax on your all income, regardless of state and then give you a credit for tax paid to another state, so you are not taxed twice on the same dollar. 

Other states may just focus on your in-state income and determine the tax on that income and not worry about the out-of state income and the related tax.

is your federal income accurate? is there a duplicate entry somewhere? Hard to beleive there is a glitch, otherwise there would be a lot more complaints in these boards.

is that the issue?  

[JimO2]

The only investment income I had taxable by Colorado were ordinary and qualified dividends and capital gains that doesn't amount to much. These were from an IRA invested in a short term bond mutual fund. The financial firm I invested through is located in Colorado. They inadvertently used my wife's Colorado address as my residence so Colorado tax was withheld.

I understand that my  pension income should only be taxed by Michigan, but for some reason, it is applied by TurboTax on the Colorado forms (though it appears to be given back by Colorado in the calculations I mentioned previously)

I'm going to go through the tax forms again to see if I had entered something in error (though I've done it several times already but your response may shed some light on where I  should concentrate my efforts).

Thank you and I'll let you know what I find.

[JimO2]

Thank you for your response. I'm going to go through the tax forms one more time to see if I had incorrectly made an entry where I shouldn't have.  I will let you know what I find.

[NCperson]

@JimO2 - a few more things

<<But there is no figure within the TurboTax worksheets for Colorado that equals what they use for calculating the Michigan tax credit.>>

1) did you enter into TT that one of you resides in CO and the other in MI as of 12/31/21?

2) on the MI return, is your filing status the same as your federal return (that is a MI requirement)

3) both states begin their calculations with the federal AGI (and I presume you file joint on the federal return)

4) start with the CO return, since it begins with Federal AGI, is all YOUR income - including your investment income-  subtracted from the CO return.  is that occuring on Line 6? 

5) the tax due CO is on line 17 of the CO form.  This should represent your spouse's CO tax (since all your income was presumably subtracted on Line 6) 

6) Then on the MI form, it also begins with federal AGI.  is your spouse's income subtracted on line 13 of the MI form?

7) the calculated tax due MI is on line17.  Is there a credit on Line 18? is that what you are asking about? THat investment income taxed in CO should create a credit on the MI side unless it was also subtracted on the CO return.

does any of that help? 

[NCperson]

<<The only investment income I had taxable by Colorado were ordinary and qualified dividends and capital gains that doesn't amount to much. These were from an IRA invested in a short term bond mutual fund.>>

and this doesn't sound right.  if this is an IRA, unless you distributed the money out of the IRA, there is no taxable income to report.  if you did distribute the money, it is all taxed as ordinary income; there is no quaified dividends or capital gains to report.  Did you key in the 1099-R correctly (there should be no 1099-B)

[TomD8]

@JimO2 --

"The only investment income I had taxable by Colorado were ordinary and qualified dividends and capital gains that doesn't amount to much. These were from an IRA invested in a short term bond mutual fund." 

Investment income earned within an IRA is not taxable.   If CO taxes were withheld this suggests that you took an IRA distribution.  IRA funds are taxable only when withdrawn and then only by the IRA owner's state of residence.    It's a bit unclear, but it sounds to me like you have no CO-source income and therefore owe no CO income tax.  If CO taxes were withheld by mistake, then in order to obtain a refund you must file a nonresident CO return on which you report the withholding but allocate zero income to CO .  And if this is the situation, line 18 of your MI-1040 should be zero.

[JimO2]

Thank you NCPerson.  Here are my responses to your questions:

1) Yes

2) Yes

3) Actually Colorado starts on Line 1 with the Federal Taxable Income (Federal AGA minus the standard deduction) and then on Line 6 subtracts an IRA distribution that was attributable to Colorado income. Trying not to confuse the issue, the financial firm that I have investments through inadvertently listed my mailing address (wife's place of residence) as my residence, and therefore, it is shown on the 1099-R with taxes paid to Colorado. Thus, the IRA distribution shown as a subtraction to our Colorado taxable income.

4) Yes. See 3) above.

5) That is correct.

6) Yes it is along with the Pension Benefits Subtraction I receive from Michigan.

7)  The investment income was subtracted on the Colorado side and the calculated Colorado tax was brought over to the Michigan side to Line 18 and then a credit calculated. This is the crux of the issue. There is a worksheet in the TurboTax forms for Michigan that is titled "Credit for Income Tax Paid to Another State". To calculate the credit, it starts with "Income Earned in Another State or Locality Subject to Michigan Tax." I cannot determine how it calculated the dollar amount shown on Line 1 of that worksheet. What income did they include to come up with that figure? It doesn't show any calculations for that dollar amount.

[JimO2]

Thank you for your response TomD8. See my responses to NCperson.  I did take an IRA distribution in which Colorado tax was withheld and Colorado did refund. As stated in my response to NCperson, Line 18 on Michigan does show a credit. From what I can gather, the credit is calculated from the Colorado taxes withheld from my wife's earned income even though she is a full year non-resident to Michigan and paid no taxes to Michigan.

[JimO2]

Yes I did. It is coded as Normal Distribution on the 1099-R with Colorado taxes witheld.

[NCperson]

Let's focus on Line 6 of the CO form.... you state that the IRA distribution is subtracted, that is great.

Is ALL your income subtracted from Line 6?  look at Colorado Form 0104AD, which is additions and subtractions.

if so, then the CO return should be correct.

please confirm and then we can focus on the MI return.