How do you allocate unearned income from jointly held accounts when married couple are residents of two different states. This is for state tax return purposes.

[RC2017Tax]

Married and filing jointly for federal income tax.  Unearned income is from jointly held accounts.  Couple are residents of two different states: Colorado and New York.  How is the unearned income allocated for state income tax purposes?  Can one person claim all of it? Does it have to be shared?

[ToddL · Accepted solution]

For state tax purposes, you can use any reasonable method to allocate unearned income from jointly held accounts.

The most obvious approach is to allocate 50% of the income to each joint owner. As joint owners, each has equal access to account assets so it is reasonable to state that each has an equal claim to those assets and any income from those assets.

Another  approach would be to allocate the income according to the source of the assets in the accounts. If one spouse contributed all or most of the assets in a given account, then you could reasonably allocate all or most of the income to that spouse for state tax purposes. 

[RC2017Tax]

Thank you for your response!  Ideally we would like to allocate it all to the Colorado spouse.  Based on the comment about "allocate the income according to the source of the assets in the accounts" this would be a reasonable method as all assets did technically come from the Colorado income.  

If all of the unearned income is allocated to one spouse, is there any reporting requirement for the other (New York) state tax return?  In this particular situation, there is no New York tax liability as all pay for the New York resident is military and the New York spouse is considered a non-resident of New York (domiciled in New York but does not maintain a permanent place of abode there, does not live there, and maintains a home in a different state).

[ToddL]

Good question - since you are a New York resident, you should file a New York tax return. You will be able to exclude your military pay from New York tax, but you have to file a NY return so the state knows you qualify for the exclusion.  Remember that DFAS will be reporting your military pay to NY; they will be looking for a return from you.Until you file that return, NY doesn't know if you qualify for an exclusion or may be stationed in NY (no exclusion).

[RC2017Tax]

Thank you again.  We have received conflicting information about the need to file a NY state tax return and have been told we do not by most of the tax preparers that work on the local base.  No state taxes are being withheld from the income (I filed a form with personnel so no NY tax would be withheld due to being nonresident) so the tax return would simply be a paperwork exercise.