Nonresident Maryland taxes withheld

[dbinbrea]

I live in the state of California but did some work for an organization in MD in 2019, resulting in income of about $30,000. MD taxes were withheld in error (according to my employer) and I should be able to get them refunded. However, the income does show up on the W-2 as Maryland income and TurboTax shows that I owe another $800 to MD. I filed all taxes a month ago before I found out about this issue. 

After reaching out to the tax collection agency in MD, they sent me the following:

You can file Non- Resident form 505. File to obtain a refund of the withholding. Complete all of the information at the top of the form through the filing status, residence information and exemption areas. Check the box provided to the right of the residence information for you to indicate your withholding was withheld in error. Enter your federal adjusted gross income on line 17 in both columns 1 and 3 and line 24. Then complete lines 43-47, 49 and 51. Sign the return and attach withholding statements (Forms W-2 and/or 1099) showing the Maryland tax withheld equal to the refund you are claiming. Your return is then complete. You must file within three years of the original due date to receive any refund.

Can I do that through TT? I see that it did create a 505 for me in my filing. I do not see a way to check the box "taxes withheld in error."

[BillM223]

First, I would have assumed that you already filed a nonresident Maryland return, or else how did you know that you owed Maryland $800? If you indicated that you were not a resident of Maryland, TurboTax should have automatically chosen form 505.

Second, look at the Maryland return that you have and see if the state withholding from the W-2 appears on the return. It should be on line 43 on form 505.

Third, the suggestion that you can get your withholding back is misleading. Generally, you owe tax in the state where you live and in any states where you worked. This means that when you reported the income in Maryland, that form 505 would calculate the tax owed on that income and apply your Maryland withholding to it.

The person from the state who told you that you could get your withholding back almost certainly assumed that you didn't have any taxable income in Maryland, but you apparently did.

"MD taxes were withheld in error"

Fourth, your employer may not have intended to withhold for Maryland, but they did and it's just as well that they did since you apparently owe Maryland tax.

The only way you can get such "mistaken" withholding back is by filing a state tax return (as the state told you) because the employer has already sent the withholdings to the state and the employer can't get it back from the state.

So, look to see if you already have form 505 and if the withholding is on line 43 of the 505 and if your Maryland state income is about $30,000 and if your withholding for Maryland is about $800 short of the tax due. If so, your Maryland return is correct.

Now look at your California return. Is there a Schedule S showing your Maryland income and the tax paid to Maryland? This should carry over to Schedule P and then for form 540. If this is the case, your return is likely correct. If there is no credit for taxes paid other state (which is what Schedule S is, among other things), then try to remember: did you enter CA first or MD? In most cases, you should enter your nonresident state first so that the tax can be calculated and carried back to your state of residence.

OK, let me know what you find.

[dbinbrea]

Thanks for this detailed feedback. I went through the steps you discussed and it appears that TT did everything exactly as you said. I went and read the instructions for Maryland form 505 and 505NR and it appears all was calculated properly. So...my employer gave me bad information I guess. This all originally started when I wanted to raise the amount of MD taxes withheld for 2020 so I would not have to pay an underpayment penalty. It is when I asked them about changing my withholdings that they wrote back "In addition, I wanted to add a little more information that may assist you. If you live and work outside the state of Maryland, typically you would not owe taxes to Maryland (unless there is an old/outstanding tax debt, you lived in Maryland for a partial year, etc.)." 

So I guess I need to circle back with them and increase my withholdings, as originally planned. 

Thanks again. 

Dave

[dbinbrea]

And a bit more information. I was just re-reading my email back from the Comptroller of MD and they stated the following: "You need to let your employer know you live in California and they should be withholding taxes to California not the Maryland."  So this just adds to my confusion. 

[dbinbrea]

One last thing: this particular job is as an online adjunct professor, which means I work for a university in MD but live in CA and do all my work here. Perhaps that changes how this is looked at?

[AmyC]

MD Non-resident instructions say on page 1:

A nonresident individual is subject to tax on that portion of the federal adjusted gross income that is derived from tangible property, real or personal, permanently located in Maryland (whether received directly or from a fiduciary) and on income from a business, trade, profession or occupation carried on in Maryland and on all gambling winnings derived from Maryland sources.

That almost sounds like you would have to pay tax in MD on your MD sourced income. You would get a CA credit for the MD tax paid. Since you work remotely from CA, then the carried on in MD would not be true. Which would get you off the hook for filing MD taxes. That is a close call. Since MD sent you a letter stating that you do not have to mail, I would keep that as proof and skip the MD tax.

In 2015,  Maryland got in trouble with the Supreme Court for double taxation.  The states have been doing a lot of shifting how they operate since then.

[dbinbrea]

Thanks AmyC. I guess the question becomes: if I am working from my home in California but employed by an institution in Maryland, does that qualify as a "profession or occupation carried on in Maryland"? It seems that, either way, I will be paying taxes on it, whether in CA or MD. I just want to be sure I am following the law. 

[MaryK4]

The general rule for state income taxes is- A nonresident pays tax on any state source income (i.e. wages, business income from that state, rental property in that state).  A resident pays tax on all income regardless of where it was sourced.  To prevent the double-tax at the state level, the resident state will give a credit for any taxes paid to a nonresident state on the same income.  

Since you did not actually work in Maryland, it would not be Maryland source income.  There are a handful of states that currently tax nonresidents on the income for remote employees on the theory that even though you did not actually work in the state, the work you did was sourced in that state- but at this time, Maryland does not.

@dbinbrea

[akawazu]

My employer accidentally withheld MD taxes for me.  I lived and worked in another state the entire time.  By the time they were able to correct it, the MD taxes were already sent to MD.  How do I go about getting a refund?

I have not filed my taxes yet for 2020, but I don't see an option on trying to get a refund back.  Based on what's currently in Turbo Tax, I'm only getting about 15% of the tax withheld back from MD.

Any guidance would be greatly appreciated.

Thank you in advance

[PattiF]

You will need to file two state returns. One for your resident state and a Maryland return as a non resident. TurboTax suggests that you complete the federal return, then the nonresident return and then the return for the state where you live. 

Maryland has reciprocal agreements with Pennsylvania, Virginia, West Virginia and the District of Columbia. If your employer withheld tax for one of the reciprocal states, you can claim a refund from the reciprocal state. You cannot claim a credit on your resident return for the reciprocal state.

According to the information in the nonresident instructions for Maryland, your taxes should be returned in entirety. You will need to mail the return to claim the refund. 

[abcdefghijkl]

For those wondering, the instructions above come from Maryland's 2020 instructions for nonresidents booklet, page 2, part of instruction #4:

https://marylandtaxes.gov/forms/20_forms/Nonresident_Booklet.pdf

It is important to note that Maryland's instructions, and therefore TT's questions, relating to non-residency and taxation, are confusing because of the way they use certain words. The FAQs about withholding employee's taxes related to differing work practices especially with Covid-19 make everything quite clear -- if you neither live in nor work IN Maryland, even though your employer may be in Maryland, you should not pay Maryland employment tax. In fact, if you work in Maryland some of the time but not all of the time, you should only be taxed by Maryland for the time you do work IN Maryland, according to those same FAQs.

https://www.marylandtaxes.gov/covid/documents/TaxAlert050420-EmployerWithholdingonTeleworkers.pdf

[Donnastaxes2022]

Can I fill maryland form 505 through turbtax and  file

[Donnastaxes2022]

I live in West Virginia not Maryland but I work in Maryland. They withheld md taxes and also west virginia. how do i fill out  form 505 for maryland

[MayaD]

Maryland and West Virginia have a reciprocal agreement, and you only pay tax on your wages in your home state. Your wages are not subject to MD income tax.

First make sure you've filled out the Personal Info section correctly:

1. With your return open, select My Info in the left-hand menu.
2. Then, on the Personal info summary screen, scroll down to Other State Income, and select Edit.
3. At the Did you make money in any other states? question, answer Yes and make sure your nonresident state(s) are selected from the drop-down.
4. Select Continue to return to your Personal info summary.

On the state return:

• Select the long form (if the option is available) even if TurboTax defaults to the short form.
• Only report the income attributable to the nonresident state.
• If preparing a nonresident return solely to recover erroneous tax withholdings, enter 0 on the screen that asks for the amount of income earned in that state. This will eliminate your tax liability for that state, resulting in a full refund.
• Since you live in a Reciprocal states , consider submitting an exemption form to your employer so you don't have to file a nonresident return next year.

Always file the non-resident state return first.

How do I file a nonresident state return?