Why is New Mexico taxing more than was earned in the state as a non-resident?

[emmyjayp]

Arizona resident, earned money in New Mexico. We are being taxed on more than was earned just in New Mexico. Why is that?

[DanielV01 · Accepted solution]

What you are seeing is how New Mexico determines income tax on a nonresident.  You are not taxed on income not earned in New Mexico.  However, New Mexico pretends that all of your income is taxable in New Mexico, and then prorates the amount of that tax to the percentage of your income earned in New Mexico.  Your other income from Arizona (and other sources) is factored in to determine New Mexico tax, but is not taxed there.

[ChrisOBrien]

Are you sure about that? When I do the math... Turbo Tax is telling me I owe $230 on $2508 earned... but when I check online, the rate should be only like 1.5% on income less than about $5500... this is about 9%. Why?

[AmyC]

New Mexico prorates tax as if a full year resident. Let me do an example.

1. Pretend you earn $5,000 in NM and $45000 in another state.
2. Total income is $50,000.
3. NM says tax on $50,000 is 4.9% = $2,450.
4. Next, NM prorates for the NM portion of income
5. $5,000 / $50,000 = 10% earned in NM
6. Total tax $2450 x 10% = $245 tax to NM.

This allows NM to use a higher tax rate and is common practice.

@ChrisOBrien

[ChrisOBrien]

I understand this, but there is still a problem with the program. I have an unusual situation with multiple kinds of income from multiple jobs and multiple businesses. After lots of experimenting, I have found there is a glitch in this year’s tax software that skips a question about whether some income needs to be apportioned or not. I have finished and filed so I can’t remember what it was, but TurboTax was entering all my 1099 income as 100% taxable by the state of NM, which lead to me owing an additional ~$110 instead of receiving a ~$75 refund. 

[DMarkM1]

After entering your income and deductions/credits in the federal interview you can start/continue your NM state interview.  There you will continue through the interview to arrive at a series of allocation questions.  

The first question will be about employee wages. The next set of questions will be about other income (Capital gains, interest, dividends) and finally you will be asked about your business (self-employment) income allocation.  

There you can apportion your 1099 income as required to NM according to the sources (conducting business in NM or with NM clients).    

[ChrisOBrien]

There seems to be a glitch in this year’s program where it never gets to the last part during the state interview for some reason. 

[AmyC]

You can amend your return once it is done processing. It is something in your system and you will want to Contact Us  to resolve your issue so you can see the questions.

@ChrisOBrien

[Carmel525]

So as far as I can tell, TurboTax did not calculate the taxes we owe to New Mexico correctly. I am a resident of Georgia and earned $830 from a New Mexico company in 2021. TurboTax calculated the taxes owed to New Mexico as $633. I don't want to disclose too much personal info here but using your formula, we should have paid $40 instead of $630. We have tried to get this fixed for months but have been able to talk with anyone at TurboTax or New Mexico. 

[TomD8]

@Carmel525 --

Did you actually (physically) work in New Mexico to earn that money?

[jmp-bill]

I still don't understand how this works. I live in TX and own one rental property in New Mexico. I am a NM non-resident. I make income on the rental property and that is my only NM income. However, I have a side gig where I make about 10k/year schedule C income. This income is not made in NM, but NM adds 100% of my schedule C income to my NM income (at least Turbo Tax adds it). Why would 100% of my schedule C income be allocated to NM (column 2 question 8 on PIT-B) when none of it is made in NM? This does not make any sense. Maybe an error in turbo tax software?

[TeresaM]

It sounds as if New Mexico is not allocating your income properly, to only tax that income sourced in New Mexico.

First, please check My Info in the Federal return and be sure your address is listed as your Texas address and the box is checked for Made money in another state

1. Then go to the States section and click on the delete trashcan icon for New Mexico
2. Next, add New Mexico back and be sure it is creating a Non-Resident return
3. It will show your federal income and ask you to allocate what is sourced in New Mexico
4. You will not need to file a return in Texas, since it is one of the states with no individual income tax

[jmp-bill]

I figured it out. The NM state easystep in TT is a bit confusing. There is a business/farm allocation section and I did not realize that it was asking about my schedule C income, but it was. If I complete that, my schedule c income that is NM taxable drops to zero. Thank you for your help.