Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
Moving from one state to another can be very stressful, and one of those stresses is filing two state tax returns - one for the state where you used to live and one for your new home state. This can be less stressful if you have some basic guidelines in mind as you do your state returns.
For the most part, income, adjustments, credits, and deductions for part-year resident returns can be allocated by where you lived when the income was received. If there is income earned or received in the other state before or after moving, you may need to allocate the income to both states. In rare occasions, states have odd rules that may make income earned while working in the new state taxable in the old state. Always check both states instructions as you prepare part-year resident returns.
Allocating income from work
- Working for different employers in both states – This is the simplest scenario. In this case, you can simply refer to the last pay stub from each job for the income earned in each state. In some cases, but not all, you can use the state wages from the W-2 for the income earned in each state.
- Worked for the same employer in both states – This scenario may require you to calculate how much income to allocate to each state. For example, you work 9 months of the year for one employer, then you move in June to the new state. Therefore, you would allocate 67% (2/3 or 6/9) of that employer’s income to the first state, and 33% to the second state. This approach could also work for calculating part-year resident income if you worked in one of the two states for the entire time.
- Self-employment income – You will need to calculate a percentage of income earned during the period of residency in both states and whether there is nonresident income for either state. Adding all the business bank account statements deposits for the period before the move and dividing that by total business bank deposits for the year would be a simple way of calculating the percentage of income for the first state. After allocating income to the first state, the remains of the business income would go to the second state. If the business is located in a single state for the entire year, this method could be used to figure out the part-year resident income in the state where the business is not located.
Allocating other income and adjustments
- Interest income would be allocated at an even rate for the entire year to the place where you live. Take your interest income and divide it by 12, and then multiply your monthly interest income by the number of months lived in each state.
- Dividend income and capital gains or losses on securities should be allocated to the state where you lived if the date that the income is received can be determined. Otherwise, you can spread the income evenly between the two states in the manner you would do for interest income.
- Gains or losses on property located in one of the two states is taxable in that state the property is in and your resident state regardless of where you live when the gain was realized. For example, you have a taxable home sale in your old state after the move to the new state, you may have taxable gain on the new and old states’ part-year resident returns.
- Property related income – Income from rental real estate, royalty from real estate usage is generally taxable in the state where the real estate is located and the state of residence.
- Adjustments – In most cases adjustments are allocated in the same way that income is allocated with one exception. If either or both states allow for a moving expenses deduction, the expense is deductible in the new state only.
Always have each state’s instructions available as you work on part-year resident returns. Every state has some differences in the way they define “state source” income, adjustments, and credits.
Keep in mind if your income is taxable in both states, you may use the credit for taxes paid to another state to avoid double taxation.
