Massachusetts Part Year Resident - Full Year MA Income Source

[RMartIndiana]

My daughter worked for a Massachusetts employer the full year 2021.

She was a resident of Massachusetts until mid-March 2021. Then, she moved to another state and worked remotely.

The new state taxes her on income earned while living in that state (despite being from a Massachusetts income source).

Her employer withheld MA state taxes while she was living in MA and withheld the other state taxes (although the wrong amount) the rest of the year. So, she received a W2 with income and tax amounts for each state.

Massachusetts seems to require she complete a FORM 1-NR/PY MASSACHUSETTS NONRESIDENT OR PART-YEAR RESIDENT TAX RETURN and make income adjustments using SCHEDULE R/NR - RESIDENT/NONRESIDENT WORKSHEET. These are also the forms TurboTax is having us complete for Massachusetts.

My understanding is that MA taxes 5% on the full income earned from a MA source but allows a credit to be taken for taxes withheld by another state to avoid being double-taxed.

My issue is that the language in TurboTax is confusing or maybe I'm being too literal in my interpretation of the question. TurboTax says:
"Enter the total income taxed by other states which is also included in the income reported to Massachusetts while you were a part-year resident of Massachusetts.

Also enter the actual tax owed from the other state tax return for the income reported in both states while you were a part-year resident of Massachusetts. (This is not your W-2 withholding)."

If I literally interpret "while you were a part-year resident of Massachusetts" as the period from Jan to mid-March, then none of the income is reported to the new state (as the W-2 for the new state only includes the portion of income while living there). Similarly, the tax owed to the new state during this time is $0. 
But, the double-tax occurs during the time when she lived in the new state and received Massachusetts income --- not during the Jan - March period she lived in Massachusetts. So, strictly following the literal interpretation of the question results in no credit being applied to the Massachusetts tax return for the March - Dec time frame she lived in and was taxed by the new state. So, she is taxed at 5% tax rate by Massachusetts for the full year AND is taxed by the new state at the applicable tax rates from mid-March through December.

Am I using the wrong form or am I interpreting the language in TurboTax incorrectly?

Thank you. 

[RaifH]

You will want to file two part-year resident forms, one for Massachusetts and one for her new state. 

For the period from January through mid-March, she is a resident of Massachusetts and employed in Massachusetts. That's easy. The tax goes to Massachusetts.

From mid-March through September 13, she was a resident of her new state but she was still considered to be working in Massachusetts. Why? For tax year 2021, due to Massachusetts’ COVID-19 state of emergency, all compensation paid for services performed before September 14, 2021, to nonresidents who would generally perform such services in Massachusetts but are not due to a pandemic-related circumstance, will be treated as Massachusetts-source income.

During this period, she will be taxed by Massachusetts and her new state. She will pay the tax to Massachusetts and receive a credit for the taxes paid to MA on her new state's tax return. 

From September 14 through December 31, she is a resident of her new state, and with the COVID-19 emergency in Massachusetts over and the rule lifted, this is now income that is considered sourced in her resident state. 

On your Massachusetts return, you will want to apportion her wages from January 1 through September 13. 

On her new state return, you will want to apportion wages earned from mid-March through the end of the year. You will also want to receive a credit for the taxes paid to Massachusetts from mid-March through September 13. How this is entered into TurboTax depends on the state she moved to. 

The amount she earned solely in Massachusetts should be reflected on her W-2 as the income taxed by MA. The amount earned from mid-March through December 31 should be the amount taxed by the new state on her W-2. As for how much she earned from mid-March through September 13 which is the portion that is being double-taxed, you can either look at her pay stubs, or if she earned more or less the same amount through out the year, attribute half her wages to this period since March 15 to September 13 is 182 days, almost exactly half the year. 

[RMartIndiana]

Thank you for the reply.

But, just to clarify and see if it changes your response at all...

1) She moved from MA to another state for reasons not related to the pandemic.

2) The income she received after moving to the new state was earned while working remotely for the same employer in Massachusetts she worked for while living in Massachusetts.

So, is the income for the entire year still considered Massachusetts-sourced income both while living in Massachusetts and then after moving? That's the way I interpreted the Massachusetts DOR / tax site. Both that site and TurboTax are saying she has to file both as a NON-RESIDENT and PART-YEAR RESIDENT and use FORM SCHEDULE R/NR to determine Massachusetts applicable income.

Thanks again!

[RaifH · Accepted solution]

No, in this case, I would not interpret her income as Massachusetts sourced after her move. According to the language of the directive, if she moved from Massachusetts and it is not due to a pandemic-related circumstance, then it is not Massachusetts sourced income.

The general rule of thumb is that your resident state always gets to tax your income and a nonresident state only taxes it if it is sourced within their state. Massachusetts only considers the income to be MA-sourced if the move was due to a pandemic-related circumstance, otherwise the income is sourced to the state in which the work was performed, her new resident state. In this case, the employer was correct to withhold her new state's taxes and it's a much easier scenario because there will be no double taxation.

She would file the MA Form 1-NR/PY for Massachusetts and indicate she is a part-year resident and allocate only the portion of her income earned while she was a resident of MA from January to mid-March.

She will file a PY form for her other state and claim the remainder of her income there. There should be no double taxation from her wages, as long as she did not work within MA after establishing residency in her new state.