27 Mar Navigating multi-state income tax returns

Q. I’ll be doing my nephew’s tax return. He’s married and works in California, but his work address is Virginia and they live in New Jersey. His W-2 only shows state taxes taken out for Virginia, but his wife lives and works in N.J. Last year they filed a joint return for the federal, Virginia and N.J. Virginia revised their state return to file as married filing separately showing his income only because her income is from N.J. For N.J. can they file as married filing separately even though they will file “jointly” for the federal return? And should she be the only one to file in N.J.?
— Uncle

A. Multi-state income can get complicated.

Typically, when a taxpayer works in another state, they are taxed in that state and receive a credit on their home state tax return.

Your nephew would need to file a California return for services performed in California, said Ken Bagner, a certified public accountant with Sobel and Co. in Livingston.

Then for Virginia, he would file a return with only the days allocated that he was in Virginia, Bagner said

“This would be a separate return as required for Virginia but if the withholding was only in Virginia, there should be a large refund coming in Virginia,” he said. “For California you would also list the days in California and allocate the income based on days.”

Bagner said because no withholding was done in California, there will be significant tax due in that state.

He said typically, when this happens, he would file the Virginia return right away to obtain the refund, and then the California return.

“We either file at the end of busy season — i.e. near April 15 — or file the return the same time and select auto-debit on April 15 or later,” Bagner said, noting the filing deadline this year is April 18. “This helps the odds of the client receiving their state tax refund hopefully before having a state tax obligation to pay.”

For N.J., Bagner said, they can file separately even though they file jointly on the federal return. But because they both live in N.J., they would typically file jointly as it would be more tax efficient, he said.

“There would be a credit issued in N.J. for the income earned out of state and then taxed again in N.J.” he said. “In this case there would be a credit for Virginia taxes paid and California taxes paid as income will be allocated to both states based on days in the state.”

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This post was first published in March 2017.