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How does TurboTax calculate taxes on part-year returns?

SOLVEDby TurboTax483Updated January 13, 2023

You might think that part-year taxes are proportional to the amount of time spent in the state, but that's often not the case.

Most states divide the income earned in that state by the total annual income to come up with a percentage. That percentage is then applied to the state tax on the entire year's income—no matter where it was earned—to prorate the tax liability. TurboTax follows the rules for each state.

Below is a behind-the-scenes look at how part-year tax calculations are performed in most states (it gets a little geeky, so beware).

What counts as income?

In general, taxable income for part-year residents includes earnings received while a resident of that state, as well as income from tangible property (property that can be physically touched, such as buildings, cars, computers, or furniture) located in the state.

Income from intangible property (such as interest income, dividends, and pensions) is generally reported to the state you were living in when you received the income.

Let's say you moved from the fictitious state of Alpha to the fictitious state of Beta last year, and your total income for the year was $100,000. You earned $75,000 in Alpha and $25,000 in Beta.

According to Alpha's tax tables, the tax on your total income of $100,000 is $9,500. In compliance with Alpha's tax laws, we'd apply a factor of .75 (the percentage of your total income earned in Alpha) to the $9,500 tax to come up with $7,125. This is your total tax bill for Alpha.

The same calculation is performed on your Beta state return, except we'd apply a factor of .25 to whatever tax Beta levies on $100,000 of income, and that would be your tax bill for Beta.

Now let's suppose you earned your entire yearly income of $100,000 in Alpha, but you only lived there for 1 month. Your Alpha tax would be $9,500 (we'd apply a factor of 1 because you earned 100% of your income there) and you wouldn't owe any taxes in Beta, even though you lived there the remaining 11 months.

In other words, length of residency doesn't even come into play in most states. What matters is the percentage of total income earned in that state. The higher the percentage, the larger the proportion of taxes paid to that state.

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