Taxes on capital gains and dividends on securities bought in while living IN and sold while living in IL

[noviceattax]

I stayed in IN for some part of the year than moved to IL. I bought some stocks and mutual funds while I was living in IN and sold them when moved to IL. I also got some capital gains and dividends on them.

How should I be calculating state tax on this part of my income?

Additional Info: I am an international citizen with Resident Alien tax status in the US. I will be filing my taxes as married filing jointly.

Please feel free to ask for clarifications.

[ColeenD3]

If there was no income reported to you for the time period you lived in IN, then you do not report anything. You said you also had dividends and capital gains. If these were income for both states, you would prorate the income according to the percentage of time you lived in each state.

[noviceattax]

Thanks for the response. For better clarification, let me use the following example.

Let's say I bought some stocks when I was in Indiana and I sold them when I was in Illinois. Let us say I moved to IL on 1st Sept 2021 and the following are the buying dates, selling dates, and gain on the stock:

1. Bought on 1st March 2021, Sold on 1st December 2021, and gained $90. So I had this stock for 9 months: 6 months in Indiana and 3 months in IL. Will I pay tax on $60 to IN and $30 to IL?
2. Bought on 1st September 2020, Sold on 1st December 2021, and gained $150. So I had this stock for 15 months: 12 months in Indiana (4 months of 2020 and 8 months of 2021) and 3 months in IL of 2021. Will I pay tax on $120 to IN and $30 to IL? And by this logic, $40 is the tax of the previous (4 months of 2020) year. Right?

Please feel free to ask for clarification.

[RaifH]

The capital gains on the sale will be reported to the state that you resided in at the time of sale for the year that you sold them. In both examples, the entire amount would be reported as capital gains in Illinois in 2021. 

Since dividends are usually released on a monthly or quarterly basis, you would report those as income for the state you resided in when you received the dividends. So if a stock you owned released dividends in March, June, and September then you sold it in December, you would report the March and June dividends to Indiana. The September dividend and the capital gains from the sale would be reported to Illinois. 

[noviceattax]

Thanks a lot. This explains very well.

[noviceattax]

Hi @RaifH, One more clarification here, what to do with the dividends from mutual funds?

I by-default reinvest them. So, I am assuming no tax on them. Right? In any case if I have to pay taxes on DIV from MFs then, how to decide the state, as the MFs usually pay DIV and Capital Gains annually.

Thanks,

[AmyC]

Dividends are income you receive. The fact that you reinvest them does not change the fact the you received extra money, even if it was invested for you. You will receive a 1099-DIV for any dividends that needs to be reported on your tax returns. Each state will have whatever share was earned while in that state. You can check your dividend distribution dates to determine which state you lived in.

The caveat being dividends from IRA/ pension/ retirement type plans would not be taxable. A regular mutual fund would be.

[noviceattax]

Hi @AmyC ,

Thanks for your response. You mentioned that one can determine the tax receiving state by looking at the dividend distribution date. My question is regarding Mutual Fund (MF) dividends, which of the following two dates we should look at:

1. When my broker or MF manager sent the dividend/capital gain to me. Or,
2. When the broker got the dividend/capital gain from the underlying stock. Usually, MFs keep getting DIVs and income by selling securities regularly but release them to investors only at certain times.

I think we should look at the date 1, to determine the tax receiving state. Is that correct or not?

Thanks.

[JohnB5677]

I disagree.  The date should be determined by when you received the dividend.  You received it when it was deposited in your brokerage account,  This is regardless of when the broker sent it to you. 

[noviceattax]

Hi @JohnB5677, Thanks for your response.

Context: I am talking about dividends from Mutual Funds (MF). I am trying to put a simple example to talk about the critical point. I have attempted to keep it very simple but still comprehensive. Please feel free to ask for clarifications.

Let us consider the following example. I have an MF with broker VGuard, and the MF has shares of companies A and B.  Assume I moved from State 1 to State 2 on 1st September.

Important: I checked my 1099-DIV. It doesn't have information about when VGuard got the dividends from the companies. It only tells when it was issued to me. So, I don't think we can determine the date when the broker got it. But for the sake of understanding, let us consider the following example.

Let us say that company A sent the following dividends to VGuard: (This is not available in real 1099s)

1. $100, on 1st March 2021 (Before Moving)
2. $100, on 1st December  2021 (After Moving)

And company B sent the following dividends to VGuard:  (This is not available in real 1099s)

1. $100, on 1st January 2021 (Before Moving)
2. $100, on 1st  August 2021 (Before Moving)

VGuard consolidated these and sent them to me in the two slots as shown below:  (This is the only information available in actual 1099s, and details about when the VGuard got it is not there.)

1. Slot 1: $ 200 on 1st April (Before Moving) -- [ Note: This has dividend from Company A and Company B, which VGuard also got before I moved.]
2. Slot 2: $ 200 on 10th December (After Moving) -- [Note: This has dividend from Company A, which VGuard got before I moved, and from Company B, which VGuard also got after I moved.]

Questions:

1. Taxes from slot 1 DIV will clearly go to State 1.
2. What about Slot 2? Will it completely go to State 2 or split between the two states? If split, then how to calculate that split. Remember that 1099 doesn't tell when the VGuard got these dividends (I have just mentioned them in my example to explain).

Thanks,

[DianeW777]

Yes, Slot 1 will be fully reported on your resident state for the first part of the year (IN) and Slot 2 example will all go on State 2 (IL), your resident state when you received the income.

As indicated by our awesome Tax Expert @JohnB5677, the dividends and/or redemptions/sales will be reported on the state return where you resided when you received the dividends and/or proceeds. It's not important when the broker got it.