How to calculate days/portion to file state tax with two states?

[freegator]

I relocated from State A to State B in the first half of 2023 and I assume I need to file state taxes with both states. I have no idea how to count the number of days and how to calculate the portion of income for each state. I would really appreciate it if the experts in this forum could kindly have a look at my case and help me figure this out. 

I would divide my 2023 into four periods:

1. I lived and worked in State A.
2. I got a new job with a company in State B. For the first few weeks, I worked on site in State B and stayed in a hotel from Monday to Friday, but went back to State A for the weekends.
3. For the next few weeks, I worked remotely from my home in State A for my new company (whose office is in State B).
4. I relocated and worked on site in State B and lived in State B, without going back to State A.

I would assume my periods 1 and 4 are relatively simple but how do I count days during those periods? Should I count all days or just weekdays? How should I count days during my periods 2 and 3?

My period 4 is more than half a calendar year so I assume I should file as a resident for State B and a non-resident for State A?

[PaulaM]

First indicate in My Info or Personal Info section (depending on which program you are using) your resident state (State B)as of 12/31/23, then enter previous State A and the date you became a resident of State B. Then enter your W-2 forms as they are reported.

When you are ready to prepare your state returns, prepare your prior resident state first,  then your resident state. Allocating income to each doesn't sound like it should be too difficult given that your old job took place in old state and that's the only place you worked that job correct? 

There are a few different allocation methods outlined in How do I allocate (split) income for a part-year state return?

[freegator]

Thanks for the reply! Right, my old job only took place in my old state (State A during Period 1). However, I think my new job is more complicated as I was in both states back and forth (Period 2 & 3).

I wouldn't want to simply split year 2023 by the date (starting date of Period 4) I moved to State B, because State A has a higher tax rate and there were days I wasn't in State A at all (Period 2). Also I don't think the state wages on my W-2 are accurate as I didn't change my address on file with my company until more than a month after my relocation. Therefore, the state wage and withholding for State A is more than it should be on my W-2. Is there a more "sophisticated" way to do this in TurboTax?

[DMarkM1]

Start by understanding your resident state(s) tax income no matter where it is earned.  Typically, your non-resident state only taxes income earned in that state.  I say typically because some states have reciprocal tax agreements whereby the non-resident state will not tax income for residents of the reciprocal state.  You might repost with the states involved in your situation which will affect how the income is filed.  Below is assuming there is no reciprocal agreement.

You will be filing as a part-year resident in states A and B.  Yes, you are correct job A while resident in state A is all state A taxed income.  However, Job B located in state B is all state B source income and taxed by state B.  Further, the period you were still resident in state A while working job B is also taxable by state A.  It doesn't matter that you physically worked in state B some days and worked from home in state A others; your resident state taxes the income no matter where it was earned. 

After entering your income and deductions in the federal interview work your state B interview.  NOTE:  The form W2 is entered just as you received it in the federal "Wages & Income" section; you will allocate in the state interviews.  After working the state B interview find the total state B income and total state B tax liability in the state tax summary using the steps below and make a note of the amounts; you will need those later. 

1. Select "Tax Tools" in the left hand menu
2. Select "Tools"
3. Select "View Tax Summary"
4. Select "Preview My 1040" in the left hand menu

5. Select the applicable state B tax summary.

Now work your state A interview.

Part of the income from job B is allocated to state A based on your residency period.  Count the pay periods for job B while still resident of state A and divide that by the total number of pay periods for job B.  Multiply that percentage by the W2 Box 1 amount to arrive at the job B income to be allocated/taxed by state A.      

Having said that, your resident state A typically offers a credit for taxes paid to another state to mitigate the double taxation. In the credit section of your state A interview you will typically find the credit for taxes paid to another state topic. There you will be asked what was the income double taxed by the state B (enter the amount of job B income you allocated to state A) and the tax on that double taxed income.  To find that tax number divide the amount of income allocated to state A by the total state B income (from state B tax summary).  Multiply that percentage by the total state B tax liability (from state B tax summary) to arrive at the tax by state B on that double taxed income. 

This will get you a credit on your state A return. 

[freegator]

Thanks DMarkM1 for the extremely detailed answer! I really appreciate your kind help! I think I was able to understand it much better and had some follow-up questions:

I found out that in my case, the two states A and B do have a reciprocal agreement and that I believe I should file as "Part-Year Resident" for both states. Does having a reciprocal agreement make the calculations a lot easier if I understand correctly? Basically I will just allocate any income from Job B to State A before the date of my relocation, and allocate the remainder of my income from Job B to State B?

In terms of allocating the income of my Job B between the two states, should I prorate my total income from Job B according to the number of calendar days while a resident of each state, or should I do it according to the paycheck date (whether each paycheck is before or after my relocation)? Since my Job B had a sign-on bonus and a relocation allowance, how to the allocation can make a difference. 

[DMarkM1]

Yes, with the reciprocal agreement it is much more simple.  You are correct there will not be any double taxation or any credit for taxes paid to another state.  Allocate all income based on where your resident state was when you received the income. I recommend using the pay dates (when received).  So the number of pay dates prior to relocation divided by total number of pay dates in 2023 from employer B belong in state A.  The bonus and allowance also will be based on your resident state on the date you received them.       

[freegator]

Thanks DMarkM1 again for your explanation! Just to make sure I got the math right for the allocation. Counting the number of pay dates is basically assuming each paycheck is the same amount, right? What if my first paycheck is larger and the paychecks after that is more or less the same amount (but not exactly, can fluctuate by a few bucks)? 

Assuming I have a total of 10 paychecks from Job B. The first one is $3000, and other 9 is $1000 each. The first 3 paychecks are dated before my relocation, and the other 7 are dated after my relocation. My number of days before relocation is 50 and after relocation is 200. Then which is the correct way to allocate my income?

1. Sum paychecks according to its date before/after relocation: State A = $3000 + $1000 + $1000 = $5000, State B = 7 x $1000 = $7000
2. Prorate according to number of paychecks before/after relocation: State A = (3/10) x $12000 = $3600, State B = (7/10) x $12000 = $8400
3. Prorate according to number of days before/after relocation: State A = (50/250) x $12000 = $2400, State B = (200/250) x $12000 = $9600

[DMarkM1 · Accepted solution]

You are correct allocating by days or pay periods assumes the pay is relatively the same each pay period.  The most accurate, if the information is available, is, as you mention, to use the actual paystubs and allocate those according to where you were when you received them.  

Typically, a W2, date of move, and pay period length (weekly, bimonthly, monthly) will be the information available to you and the taxing agency will only have a W2 and the dates you provide.  A taxing agency will generally use days to allocate and if your figure is reasonable, you will be good.  If your figure is way off, you will just need to be prepared to show how you calculated should it ever come up.  If you can show uneven pay with the bulk of pay in another state, for example, that will work.      

 The allocation just needs to be logical for your situation.      

[freegator]

Thanks DMarkM1 again for the clear explanation! Just some quick follow-up questions:

1. If I am adding up paystubs, I should sum the amount called "Federal Taxable Wages" on each paystub, even though it is really meant to calculating state taxes, right?
2. The amounts allocated to each state, when added together, should equal Box 1 on my W-2, right?
3. Box 16 "State wages, tips, etc" of W-2 basically can be ignored when doing my state returns since my employer was not immediately aware of my move and did not have my exact date of move, right?

Just curious, if two states do not have a reciprocal agreement, then the income from working out of state is always fully taxed by both states, but you may claim a tax credit for every dollar you paid to the other state in your state of residence to avoid double taxation? 

[DMarkM1]

Yes to all four.  

1. Yes, use all the taxable wages.  
2. Yes, the total of allocations to each state should be your box 1 income.  
3. Yes, the state numbers on your W2 are based on what the employer knew. You will make the correct entries on your return. 
4. Yes, that is how non-reciprocal state taxes typically work.  The resident state taxes income no matter where it is earned while the non-resident state taxes that state's source income.  That sets up double taxation which is mitigated typically by the resident state offering a credit for taxes paid to another state.   

[freegator]

Thanks @DMarkM1 again for the clear explanations!

Just realized that I may have an additional question as I am doing the state 1040 forms. Since I am considered "part-year resident" for both states, can I claim the full amounts of "personal exemption allowance" for both states? Or do these exemptions need to be prorated as well? On state 1040 forms, it seems that it is only determined by your filing status of "Single" etc., without any information if a part-year resident can still take the full exemption or only a portion of it. Could you please help clarify this?

[DMarkM1]

It depends on the laws of the state(s) involved.  Typically, this is all handled automatically in TurboTax.  If a prorated personal exemption is required by the state(s) you are filing in, TurboTax will prorate per the state rules.  Most, if not all, states that prorate exemptions use the same proration factor as used for the state tax (allocated income/total income).  So once you have done the allocations TurboTax can/will calculate any required prorations.  If you post the states involved someone may be able to provide the specifics for those states.