Sign On Bonus Taxed by Two States

[laceysharpe]

In 2022, I was a resident of CA until 9/1/2022 when I moved to NC for a new job.  The new job required training at the offices in MD for two weeks of which 3 days required work in the VA office. (Note - the two week salary is assigned to MD per the W-2).  I received a sign on bonus prior to 9/1/2022 (while in CA prior to training in MD/VA).  The W-2 of my new position in NC has the sign on bonus taxed in CA and VA. Do I really have to pay tax on the bonus to VA?  Thanks so much for any insight!

[tagteam]

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@laceysharpe wrote:

Do I really have to pay tax on the bonus to VA? 

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Perhaps not, but you are probably going to have to resolve this with your employer since a copy of the tax reporting statement (W-2) was sent to VA.

[Opus 17]

@TomD8 often has good insight on multi-state tax issues.

You can report your income differently than recorded on the W-2, but you may have to answer letters from the states. 

Regardless of what the W-2 says, I believe you allocate your income manually in Turbotax, so if you want to allocate less income to Virginia, you probably can.  I don't remember how to do that, and you might get a letter from Virginia asking about the discrepancy.

For California, the state will want to tax the sign-on bonus because it was paid while you were living in California, but it might not actually be taxable there, since it was "earned" based on you living and performing work elsewhere.  It would be worth digging into the California regulations to see.

I suspect NC will want to tax the bonus if they find out about it, for the same reason (it is based on your NC job).  (By way of comparison, I moved from NY to VA on 7/1/2019, and received a bonus from my NY job on 9/30/19 which was the end of the fiscal year.  I reported it in NY but not VA.)

For Maryland and VA, I think the bonus should probably be pro-rated.  You had the NC job for 4 months, which is approximately 17 weeks or 85 work days, depending on whether you count holidays and so on.  My thinking is that your taxable income in VA is 3 days of actual wages plus 3/85th of the bonus, and your taxable wages in MD would be 7 days of actual wages plus 7/85th of the bonus.  

Assuming that I am correct, you would manually allocate your income between the 4 states, overriding any automatic calculations as necessary.  VA might send a letter asking for an explanation.  One thing VA does not have a right to is to tax the entire bonus, because it was not paid to you while you were a permanent or temporary resident of Virginia.  The least they might be entitled to tax is zero percent of the bonus and the most they might be entitled to tax is 3/85th of the bonus, since you earned 3/85th of it during your Virginia training. 

You may want to consult with a tax profession who has experience with multi-state returns.  Other experts here may have additional suggestions.   

[laceysharpe]

Thank you for the responses!  I am surprised at how complicated this is and that I may have to pay multiple states tax on the same money :(

[Opus 17]

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@laceysharpe wrote:

Thank you for the responses!  I am surprised at how complicated this is and that I may have to pay multiple states tax on the same money :(

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If done correctly, you claim credits that offset the tax, so the net tax is equal but not more than the higher taxed state.

For example, assuming I am correct and you report 100% of your new job (including the bonus) in NC, and you also report 3/85th in VA and 7/85ths in MD, you will claim a credit on the NC return for the tax you paid in MD and VA. (This requires that you calculate the other states first and NC last.)  And if CA and NC both tax the bonus, CA should give you a credit for the taxes you paid in NC on the bonus.

You may want to see a professional this year since you have 4 state returns to prepare.  Turbotax can do 4 state returns with one federal return, but the question of how to properly allocate your income (especially the bonus) to the 4 states may require a bit of research.

[Opus 17]

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@laceysharpe wrote:

Thank you for the responses!  I am surprised at how complicated this is and that I may have to pay multiple states tax on the same money :(

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"For Maryland and VA, I think the bonus should probably be pro-rated.  You had the NC job for 4 months, which is approximately 17 weeks or 85 work days, depending on whether you count holidays and so on.  My thinking is that your taxable income in VA is 3 days of actual wages plus 3/85th of the bonus, and your taxable wages in MD would be 7 days of actual wages plus 7/85th of the bonus."

Lastly, I could be wrong on the bonus, and that it is only taxed in CA since that's where you were living when it was paid.  That's the simplest case, because then you file a part-year CA return reporting only the income that was paid while living in CA (your old job plus the bonus).  You file a part-year return in NC reporting all your wages from the new job, but not the bonus.  You also file a non-resident return in VA and MD reporting 3/85th and 7/85ths of the wages, ignoring the bonus, and NC gives you a credit for the VA and MD tax you paid.

But the issue of where the bonus gets taxed is the one that will cause the most headache, and needs to be properly researched.  

[NCperson]

@laceysharpe let's try and simplify this. 

1) you were a resident of CA until 9/1/22.  You will file as a 'part time resident' and report all your income received in CA throught 8/31/22.

2) you worked in MD for two weeks and the income for those two weeks was assigned to that state. You will file as a 'non resident' of MD and report those two weeks of income.

3) you were a resident of NC post 8.31.22.  You will file as a 'part time resident' and report all your income received in NC.  (That will exclude the two weeks in MD). 

4) if your W-2 has withholdings in VA, you will file as a 'non-resident' and get any withholdings back.

There is no overlap in income the way I laid this out.  Presumably you are stating your W-2 shows income in 3  these three states: CA prior to 9.1; NC after 8.31 (except for the two weeks in MD which is separate). 

I can't imagine the sign on bonus was reported to two states - that would mean if you summed up the state income from each state (line 16 of the W-2)  it exceeds the federal income reported (box 1 of the W-2).  Please clarify whether or not that is the case.

[laceysharpe]

On the W-2 the sign on bonus is listed for CA and again for VA with taxes withheld in both cases.

[DoninGA]

This has to be resolved by the employer since they incorrectly entered on the W-2 that the employee earned the exact same income in two separate states.  The employer needs to issue a corrected W-2 removing the income from the state where it was not earned by the employee.

[NCperson]

and again, if you sum up Box 16 for each state and compare it to Box 1, what do you get?  they should be the same.  this is on the W-2.  

are you sure that the bonus is being reported to both States - the simple math above will confirm 

[laceysharpe]

Yes, the employer lists the one sign on bonus for two states (CA and VA).  When you add the state listed income it does not match the federal income.  I initially thought I had somehow entered the sign on bonus twice.  That is when I looked back at the W-2 and noticed the state entries.  Actually, Turbo Tax had an option - 'employer incorrectly reported the income' on the state return.  I checked that for VA and then it asked for the state of residency and I selected CA.  So, we will see what happens.