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)?

[TomD8]

"I did take an IRA distribution in which Colorado tax was withheld and Colorado did refund"

Then Line 18 of your MI-1040 should be zero, since in fact you paid no tax to CO.

In the Personal Info section of TT, did you and your wife both indicate that you had no "Other State Income"?  And did you each enter your "State of Residence" correctly?

[NCperson]

@JimO2 - okay ; I think I figured it out by replicating what you stated in TaxSlayer, which is a competing product

1) on the CO return, make sure you are tagged as a non-resident and your spouse is tagged as a resident.  Look at Form 104PN.  if you then review the CO return, you should see the subtraction for the non-resident income and then the tax is calculated on your spouse's income only.

2) then on the MI return; this is a little tricky.  You must file with the same status as on the federal form.  I indicated in Taxslayer that you both were non-residents.  (I can't see a way of marking one as resident and one as non-resident, esp since the filing status has to follow the federal return.). Your spouse's income should automatically be subtracted from Line 13 and then the tax is calculated on  Line 17 and Line 18 is blank! Further look at Schedule NR where your state standard deduction is adjusted to reflect only your income is taxable in MI 

does that work? 

[JimO2]

No. Only the IRA distribution is subtracted.

[JimO2]

Yes to both questions. Thanks.

[JimO2]

1) - I am tagged as a CO non-resident and my wife is tagged as a resident. 

    - The only subtraction as a non-resident is my IRA distribution.  But the tax is not calculated on my wife's income only. Line 32 of Form 104PN has the Federal MAGI. Line 33 has the CO MAGI (my wife's CO income minus my IRA distribution (?)). On Line 34 a percentage is calculated by dividing CO MAGI by Fed MAGI.  Line 36 applies that percentage to Line 35 (what appears to be tax calculated on income from both my wife and me, i.e., Form 104, Line 7 has Colorado Taxable Income as our Federal Taxable Income minus my IRA distribution amount).

2) - Michigan return has same status on Federal (i.e, I'm a full year resident of Michigan; my wife is full year resident of Colorado).

    - Line 13 is correct. Line 17 correct based on exemption allowance calculated. Line 18a has Colorado Tax from CO 104PN, Line 36. Line 18b provides a credit. 

    - Schedule NR reflects only my Michigan income when adjusting the standard deduction

[NCperson]

1) Colorado - that appears to be correct.  The form is calculating the state tax on the ENTIRE federal income but then applying the percentage as calculated on Line 35 against that tax and says that percentage is the CO portion and forgets the rest.   

2) Now, Michican is still a problem.  You should NOT get a credit for tax paid to CO on CO income if MI is calculating tax on MI income only.  

Please review the MI 1040 form.  At the top left, Box 7b should be checked indicating you are filing married-joint.   Box 8b - and I bet this is the problem - should be checked indicating you are non-residents; as I stated earlier, I do not see a way to tag one as a resident and one as a non-resident; the form simply is not set up that way.  That should automatically create Schedule NR, eliminating your spouse's income from the calcuations and determining the tax based solely on your MI income.  Review Schedule NR and then Line 18 should be zero. 

It simply does not work correctly to state that you are both residents.  If Line 8a is checked as a resident it will not calculate property.  Under this approach the tax paid in CO becomes a credit in MI on Line 18.   I tested this in TaxSlayer and can see it's not correct. 

Let me know what you discover. 

[JimO2]

Thank you. Putting both of us as non-residence of Michigan zeroed out Line 18.  That appears to have been the problem (though it only changed the amount of overpayment by negative $12). But what is of concern is my Federal and Colorado showing that I am full year resident of Michigan and my wife is full year resident of Colorado.  According to TT and Michigan instructions, I have to submit my Federal and Colorado returns with my Michigan's (had to do an amendment to change filing status). Won't that be a red flag to Michigan suspecting that I'm cheating or at least making an error regarding residency on my Michigan return?

[NCperson]

@JimO2 -

You ARE fully disclosing your residency status! you are not hiding anything!

We can infer from the NR instructions, this is the correct approach.  Look at Page 2 of Form NR, under 'exemption allowance" it states: 

"Use lines 15 through 19 to figure your prorated exemption allowance. NOTE: If one spouse was a full-year Michigan resident and the other a part-year or nonresident, and you are filing a joint return, complete Worksheet 6. Do not complete lines 15 through 18."

why would they print this on the NR form, if they didn't expect Michgan residents with Non-resident spouses to complete the form in the manner you have? 

the only other comfort to be had is to call the State of MI revenue office and just ask, "hey, if my spouse is a non-resident and I am a resident, what box am I to check - 8a or 8b?"   

[TomD8]

@NCperson wrote:  "Box 8b - and I bet this is the problem - should be checked indicating you are non-residents; as I stated earlier, I do not see a way to tag one as a resident and one as a non-resident; the form simply is not set up that way,"  and "the only other comfort to be had is to call the State of MI revenue office and just ask, "hey, if my spouse is a non-resident and I am a resident, what box am I to check - 8a or 8b?" 

From page 9 of the 2021 MI tax instruction booklet, regarding Line 8:

"If you and your spouse had a different residency status during the year, check a box for each of you."

And from the Line 8 Box on the MI-1040 form itself:  "Check all that apply."

So @JimO2 should check both boxes 8a and 8b.

[NCperson]

@TomD8 - good catch! I had scoured the instructions for such a reference unsuccessfully previously.  

@JimO2 - once you adjust, the exemption on Line 19 of schedule NR should be $4900 - which is a full exemption for you and nothing for your spouse (which makes sense as a CO resident and a MI non-resident)

However, while section 8 of the MI1040 states to check all that apply, I could not get TaxSlayer to check both 8a and 8b boxes - not sure if that is by design or not, but the math makes sense.....there is only MI income listed and only 1 full exemption.....  

[JimO2]

Thanks NCperson.  I will call Michigan tomorrow and ask that very question. I'll let you and TomD8 know what they tell me. Thanks to both of you for staying with me on this issue. You both are great!

[NCperson]

@JimO2 with @TomD8 's additional find, the Michigan State Tax OFfice should state that both 8a and 8b should be checked in your situation (but as stated I can't figure out how to get TaxSlayer to check both boxes!!!)

[JimO2]

I contacted Michigan Department of Treasury and explained my situation with residency regarding Lines 8a and 8b on MI-1040.  They confirmed that I should indicate on Line 8a that I am a full year resident of Michigan and my wife is a non-resident on Line 8b even though there is that discrepancy between TT and TaxSlayer. Thank you both for your help and very much appreciate your expertise.