How do I allocate (split) income for a part-year state return?
Allocation, in this case, means to assign income to the state you were living in when you earned it. We'll either ask you to separate the income you earned or to verify the allocation amounts we already calculated for you.
Allocating your income shouldn’t be too difficult, but it can involve some math. You'll need to determine if the income you're allocating is earned or unearned, as these are handled differently:
- Earned income comes from employment, such as wages, salaries, tips, payment for services, and commissions.
- Unearned income comes from non-employment sources, such as interest, dividends, capital gains, social security, and IRA distributions.
Allocating earned income is easy if you stopped working for an employer in one state and started working elsewhere after you moved. All you need to do is look at your W-2 or 1099-MISC. Allocate the income from your former job to your former state and your income from the new job to your new state.
But what if you continue working at the same job while living in 2 different states? Some companies will send you a W-2 with the state totals listed, others will send you two separate W-2’s for each state. If not or they did not change the withholding to the second state you’ll have to estimate how much income you earned as a resident of one state versus the other. Here's a few ways to do that:
Method 1 – this is the simplest method of all, and the most accurate if your income fluctuates from paycheck to paycheck.
Find a paystub with the pay period ending around the time of your move. The YTD (Year-To-Date) amount on the paystub is how much you earned while residing in your former state.
Method 2 – this method is pretty accurate as long as your income is more or less the same from paycheck to paycheck.
Estimate the number of weeks/months you worked at that job while a resident of one state and divide it by the total of number of weeks/months you worked at that job to come up with a factor. Then apply the factor to your total income from that job to come up with the allocation for that state.
For example, if you worked at that same job the entire year and moved in early May, you earned roughly 4 months' worth of income (1/3 or 33% of your total income) in your old state. Multiply the total income from that job by .33 to obtain the allocation for your former state; the remainder gets allocated to your new state.
Method 3 – this method is the most accurate, but it also assumes your income is more or less the same from paycheck to paycheck.
First, find the Julian date of your move (also called an Ordinal date). Search for "Julian Calendar" in your favorite search engine.
- For example, if you moved on August 7, 2018, the Julian date is 220 which simply means August 7 is the 220th day of 2018.
Then divide your Julian date by 365 to come up with a factor, which should be less than 1. Apply your factor to the year's total income from that job to get the income allocation for your former state. The remainder is allocated to your new state.
Tip: Your payroll department may also be able to help. They should have access to time sheets and other records that can give you an accurate picture of your earnings before and after your move date.
Allocating unearned income is pretty straightforward – just allocate it to the state you were a resident of when you received it. Here are some examples:
- You received 3 quarterly dividend payments while living in Arkansas, and the remaining dividend while living in Oklahoma. Allocate the first 3 payments to Arkansas and the last payment to Oklahoma.
- You sold some stocks right after you moved to Iowa. Allocate the gain to Iowa.
- You closed an interest-bearing account while still living in California, so you'd allocate 100% of the interest to California.
- On the other hand, if the account remains open, you'd allocate the interest you earned as California resident to California, and the remainder to your new state. An easy allocation method is to divide the year's interest by 12, and then multiply the figure by the number of months you lived in each state.