MD State Filing - Interest Charges

[ryankhkim]

This is my first year living in MD while working in DC. Given the reciprocity agreement between the two states, DC is refunding me taxes withheld throughout the year while I am paying taxes to MD during tax filing. The issue is MD is charging me interest charges for the taxes not paid throughout the year (or withheld via DC). Is MD appropriately charging me interest in this situation or would there be a form  I can file to avoid interest charges for my current filing or in the future?

[dmertz]

Since you had no Maryland tax liability for 2020, there was no required quarterly payment.  When preparing your 2021 Maryland tax return in 2021 TurboTax, make sure to indicate that your 2020 Maryland tax liability was zero.  With no 2020 Maryland tax liability, no Form 502UP should be present in your 2021 Maryland tax return.

[ryankhkim]

@dmertz 

Thank you for your answer. No where in my MD state filing I have indicated MD tax liability for 2020. Any idea how I can explicitly record  the nonexistence in my filing or prevent Form 502UP from being automatically populated?

[ryankhkim]

Hi, even after going through the instructions for 502UP, I am unclear as to whether I really need to pay interest charges or not in my current situation. If anyone could help, that would be much appreciated.

[dmertz]

Section 03.04.01.02(A)(4)(b) of the Maryland Code of Regulations says that the unpaid tax subject to interest and penalty is the lesser of 

(i) 90 percent of the tax required to be shown on the return for the current taxable year; or
(ii) 110 percent of the tax paid for the prior taxable year, reduced by any credit allowed under Tax-General Article, § 10-703, Annotated Code of Maryland.

03.04.01.02(A)(4)(b)(ii) is the safe harbors that applies in your case.  110% your 2020 Maryland tax liability is zero, so required quarterly payments would be $0.

I can't find any way to tell 2021 TurboTax in step-by-step mode to indicate that your quarterly payments were equal to 1/4 of 110% of the 2020 Maryland tax liability.  I've only been able to do it by marking box B on the Maryland Form 502UP in forms mode of the CD/download version of TurboTax.  I don't have access to the online version of TurboTax's Maryland module so I don't know if the online version provides this capability, but I doubt it.  Marking box B causes TurboTax to omit Form 502UP from your filing.

[dmertz]

I have assumed that when you said that this is your first year living in Maryland but working in DC that you did not live in Maryland last year.  After rereading your question, I suppose it's possible to interpret that statement as meaning that you lived and paid taxes in Maryland last year but did not work in DC, in which case you are stuck with the interest unless you can obtain a waiver from the Comptroller of Maryland.

[ryankhkim]

@dmertz 

Thank you for your detailed reply. I can confirm that 2021 was my first year living in Maryland with no taxes due for 2020. My only question is - does the 110% rule apply even if this is my first year paying taxes in MD? I do use the desktop version, and Turbotax even asked me whether this is my first year filing taxes for MD for this specific question. It still generated the interest charges despite this entry. 502UP form generated by Turbotax desktop version has a checkbox for first time MD filer and simply uses 90% of my 2021 taxes due as the evaluation of underpayment of taxes, so I just wanted to be safe in making sure I’m rightfully using $0 as the main reference (110% of my taxes due in 2020).

[dmertz]

I suggest calling the Comptroller of Maryland.