Utah Credit For Taxes Paid to Another State

[Prudence]

I filed 2021 taxes as a part-time resident of Utah and a part-time resident of the District of Columbia.  I also filed a non-resident return in Maryland solely due to rental income there.  I was in UT from Jan-Sep and was in D.C. from Sep-Dec.  The Maryland rental was for the whole year.  

Am I eligible for a credit on my UT return for the portion of tax paid to Maryland for the Jan-Sep period?  Am I eligible for a credit on my D.C. return for the portion of tax paid to Maryland for the Sep-Dec period?

Thanks in advance.

[Anonymous_]

@Mike9241 

[Prudence]

@Mike9241

I could not see your reply.  Was there one?

Thanks.

[TomD8]

The general rule is that you're eligible for an "other state credit" whenever you have income that is taxed by two states.  You would claim the credit on your resident state's return.

If you literally moved to DC (as opposed to going there for temporary purposes such as school, while maintaining Utah as your permanent home), then you will file one non-resident return (MD) plus two part-year-resident returns (UT and DC).  You would pro-rate your other state credit between UT and DC.

If you maintained your permanent home in UT all year, you need not file a DC tax return since you lived there for fewer than 183 days.  In that case you'd file a resident UT return and a non-resident MD return only.

[Prudence]

Thank you very much for your response.  That was my assumption as well.

However, with respect to Utah (UT), is it correct that a part-year resident return can only take the credit for taxes paid to the other state if one is domiciled in the other state?  In other words, a part-year resident return can not receive the credit for taxes paid on a non-resident return?

That appears to be the implication of the following text from the Utah tax Commission website:

Part-year residents rarely qualify for this credit. If you are domiciled in Utah for part of the year and domiciled in another state for part of the year, you may only claim credit on the portion of income:

1. taxable in Utah,
2. taxed also by the other state(s), and
3. included in “Column A – Utah” income on form TC-40B.

Part-year residents must prorate and enter the tax paid to the other state(s) on TC-40S, line 6. The credit only applies to tax paid on the part of your income (TC-40, line 1) taxed by both states.

Thanks.

[TomD8]

@Prudence wrote: "However, with respect to Utah (UT), is it correct that a part-year resident return can only take the credit for taxes paid to the other state if one is domiciled in the other state?"  

No, that's not correct.

You absolutely can claim the credit for earnings from a non-resident state.  In fact, almost all "other state credits" are due to earnings from non-resident states.  Think of someone who lives in Utah but works in Idaho, for example.  That person is not domiciled in Idaho but he must pay taxes to Idaho because he works there.  And he is fully entitled to claim the other state credit on his home state Utah return, even though his earnings are from a non-domicile state. 

The example you cited refers to a taxpayer who moves to another state and thus is a part-year resident of each of the two.  In the example, no non-resident state is involved.  But your situation is different because a third, non-resident state, MD, is involved.

[Prudence]

Thank you for your response.

As a follow up, does Utah distinguish between “earnings” and rental income.  The income on my Maryland non-resident return is entirely from rental income.

Thanks.

[TomD8]

"The income on my Maryland non-resident return is entirely from rental income."

That doesn't matter.

The issue is whether or not the income is taxed by both states.  Since the rental income is taxable by both MD and by your resident state, you're entitled to the credit.

The purpose of the "other state credit" is to prevent double taxation.

[Prudence]

Thank you for your response, TomD8.

Based on a similar understanding, I pro-rated the credit for taxes paid to Maryland between Utah (UT) and the District of Columbia (D.C.).  I was a part-year resident in UT and D.C., but the MD rental was all year long.

This approach appears to have caused an issue for UT, but not for D.C.  UT claims, without explanation, that I am not entitled to this credit.  Interestingly, in prior years when I was a full-year resident of UT. I received the credit for taxes paid to MD on the rental income.

I wonder if UT applies the general principle differently when a part-year resident return is involved.  For example, one difference, when compared to a full-year resident return, is that the full amount of rental income is not taxed by UT.  Relatedly, the UT credit for taxes paid to other states (credit #17) is categorized as a non-apportionable credit.

Any thoughts?  

Thanks.

[TomD8]

The fact that you're a part-year UT resident doesn't matter.

From the Utah Code:

"If you are a Utah resident or part-year resident with income that is taxed by Utah and another state(s), the District of Columbia, or a possession of the United States, you may be entitled to a credit for income tax paid to the other state(s)." 

https://incometax.utah.gov/credits/tax-paid-to-other-states

Did you claim credit on your part-year resident UT return only for the portion of MD taxes you paid while you were a UT resident?

[Prudence]

Thank you for your response.

Yes, I prorated the taxes that I paid to MD based on my part-year residencies in UT and D.C.  However, the tax, which was for 2021, was physically paid in 2022.

I thought that there may be some unusual wrinkle because UT notes that part-year residents rarely receive the credit.

Thanks.

[TomD8]

"I thought that there may be some unusual wrinkle because UT notes that part-year residents rarely receive the credit."

That's because most part-year residents have moved to another state and taken a new job - and thus have no double-taxed income.  Your situation is different because you have double-taxed income.