Income allocation for remote employment

[hmccain]

This year, I moved from Maine to Arizona, but I am still working remotely for a company in Maine. I am filing returns for both states. In my Maine filing, I am asked how much of my "nonresident period" income (e.g. income earned while living in AZ) was from Maine sources. Since I work for, and am paid by, a company based in Maine, should I say that 100% of my "nonresident period" income was from Maine sources? This drastically changes the taxes that I would be paying in Maine.

[KatrinaB48]

Yes, you should answer that you earned 100% of your income from Maine.

[hmccain]

Thanks, Katrina. But what will I do next year, when I am living in AZ but earning all of my income in Maine? My understanding with remote work was that (with a few exceptions, like CA and NY), you only pay taxes in you state of residence (e.g. AZ, in my case), not in the state where your company is based.

[KatrinaB48]

Yes, that is correct. You should have Arizona tax withheld from your pay and next year you will only need to file an Arizona state return.

[hmccain]

Thanks. For this year, there's an option in my AZ tax return for "Taxes paid to another state or country," and there is a subset that is "taxes paid to another state or country on Non-Arizona source income while a resident."

How do I handle this?

[BillM223]

The general rule (of course there are always exceptions) is that you owe tax to the state where you live and tax to the state(s) where you physically work.

In your case, because ME is not one of those states like NY that taxes telecommuters, if you never physically work in Maine, then you don't owe tax in Maine.

HOWEVER, note that if you ever go to Maine to visit the mother company as part of your job, then you need to keep track of the number of days and tell TurboTax, because then you will be liable to pay some tax in Maine.

If you pay any tax to Maine, then, yes, you will report it on the AZ return as "taxes paid to another state or country on Non-Arizona source income while a resident."

[hmccain]

Thanks, Bill.

All of my tax withholdings were for Maine, my W-2 lists Maine, and my company is based in Maine, but I have lived in Arizona since July, and Arizona is my legal residence. I do not work in Maine.

I filled out state taxes for Maine for a partial resident. They asked what amount of my income was from my time in Maine, and I did the math and entered it. Then they asked was amount of my Arizona income was from Maine-based sources, and I entered 100% (because I am being paid by a Maine company). This leads to me paying a lot of taxes in Maine, and no taxes in Arizona whatsoever. To me, this goes against what I've read online about working remotely, which is that you pay taxes in the state where you live, not the state where your company is based. (It also means I pay much higher taxes, since Maine has a higher income tax than Arizona.)

Does this all sound right to you? Should I be doing anything differently?

[DMarkM1]

You should file part-year in AZ and part-year in ME.  You should allocate the income according to the time spent in each state.  There should be no overlap. Your answer to the question in the ME interview about AZ income from ME sources should be "Zero percent." 

As BillM223 states above ME is not a telecommuter taxing state. 

If you go to ME to actually work for some time while still living in AZ there would be some double taxation and you would then apply for the credit in AZ for ME taxing the same income.

Not the case here. No overlap, no double taxation, no credit for other state taxes.  Nice and clean.  

[hmccain]

Hi Mark,

Thanks for your answer. That conflicts with Katrina's answer, so I'm wondering if you could read my original question and make sure your answer still stands . Thanks!

[hmccain]

Furthermore, when I don't mark the remainder of my income as earned in Maine (during my time as a non-resident), it doesn't look like AZ picks up the slack and taxes that amount...

So confused!

[JohnB5677]

Bill's answer was on the mark.  In general you pay taxes where you live and where you physically work.  Allocating based on the number of days you worked in eacxh state is an acceptable way to do it.

• You will file part year resident in both states.
• Allocate only the income you earned in Maine to Maine.  If everything was taxed in Maine I expect you'll get a refund.
• Next post Arizona.  You may have to physically allocate the balance of your income to Arizona.

[hmccain]

This is helpful, thanks! How do I "physically allocate the balance" to AZ?

Maine has a handy little chart for allocating all sorts of income sources. AZ's 140PY form doesn't have that, so my TurboTax result is that I get a pretty sizable refund from Maine (when I allocate only 5 months' worth of income to Maine) and then I owe $0 in taxes in AZ (because I haven't allocated any money to AZ... There is nowhere to do so).

[hmccain]

I think part of the issue is that for "Arizona income," TurboTax is only pulling in my dividend income from my federal return — not my salary income. That makes it impossible for me to allocate any of my salary income to AZ.

I added a line to my W2 in my federal return listing my full income for AZ, but it doesn't show up on my AZ state return.

(Original question, for reference: This year, I moved from Maine to Arizona, but I am still working remotely for a company in Maine. I am filing returns for both states. In my Maine filing, I am asked how much of my "nonresident period" income (e.g. income earned while living in AZ) was from Maine sources. Since I work for, and am paid by, a company based in Maine, should I say that 100% of my "nonresident period" income was from Maine sources? This drastically changes the taxes that I would be paying in Maine.)

[DaveF1006]

State returns are tricky because there are no uniform state laws from state to state.  According to the State of Maine website, "A part-year resident is subject to Maine income tax on all income derived while a resident of Maine, even if the income is received from out-of-state sources, plus any income derived from Maine sources during the period of nonresidence."