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Discussion:W-2 Double Taxation Need Help From IL CPA's

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Discussion Forum Index --> Advanced Tax Questions --> W-2 Double Taxation Need Help From IL CPA's


Discussion Forum Index --> Tax Questions --> W-2 Double Taxation Need Help From IL CPA's

Gordo (talk|edits) said:

20 January 2012
I have a client that works for a consultant firm and does a good amount of work in five other states. When filing their tax returns a credit was claimed for the wages paid to the other states. Upon receiving a notice it appears that these wages do not qualify as they were reported as IL wages. The instructions on the SCH CR clearly states that wages reported as IL wages do not qualify for the credit. When talking to the IL processing division and one of their lawyers they said that though the wages cant be reported on the W-2 we would still report all income on the IL tax return and then claim the wages earned in other states on the SCH CR.

The taxpayer talked to her employer and they feel that they correctly reported the wages under IL law so that she is being taxed twice on the same income. Any advice from an IL CPA who specializes in IL W-2 income?

MIKEB (talk|edits) said:

20 January 2012
Im not a IL CPA, but Im wondering why he filed in other states, if all his wages were IL wages.

I would amend the other states return and report no wages. Was there withholding in any other state?

Michaelstar (talk|edits) said:

20 January 2012
It appears that from your post - the other state returns were prepared incorrectly. The wages earned while physically present in those other states are in fact most likely taxable (unless there is an agreement between the states - can't remember which ones but they are all back east)in those states.

Also, as you have been told (did not look this up) by Illinois, the credit would be taken on the Illinois return for the taxes paid on the wages taxed in both Illinois and the other state. This is a very common occurrence when preparing multi-state individual income tax returns.

Note: the credit allowed in Illinois would not be greater than if the wages had "only" been taxed in Illinois. For example - if the wages had been taxed as a non-resident in CA @ 9% - the credit allowed for Illinois would only have been either 3 or 5% depending on the year your talking about. I believe that Illinois increased their tax rate from 3% to 5% in 2011 (could have been 2010).

MIKEB (talk|edits) said:

21 January 2012
From his post, it sounds like all the wages were reported on the W-2 as IL wages.

So there is no income to report in the other states as the income was reported by the employer. He claimed the credit and it was disallowed by Il since all the wages were reported as Il.

KatieJ (talk|edits) said:

21 January 2012
Illinois has reciprocal agreements with Wisconsin, Iowa, Kentucky, and Michigan. If the employee worked in any of those states, that income is taxable only in Illinois. He has no filing requirement in the other states unless he has other income from sources there.

However, if he worked in any other state that imposes a comprehensive individual income tax (e.g, not Tennessee), he would have income taxable in that state, and get credit from Illinois for the tax he pays to it. As Michael says, the credit will be limited to the proportion of his Illinois tax liability that arises from that "double-taxed" income. In effect you pay state income tax on that income, net, at the higher of the two states' average rates for the taxpayer's filing status, income level, number of dependents, etc.

Half the time these W-2s are prepared incorrectly. If the W-2 doesn't show the correct amount of income sourced in each of the nonresident states, the employee should ask for a corrected W-2; failing that, attach a schedule to the returns showing the allocation of earnings. In any case, 100% of the earnings would be reported to IL because he is a resident there, taxable on all of his income, regardless of source.

KatieJ (talk|edits) said:

21 January 2012
PS. I just looked at the IL Sch CR instructions and I think I see Gordo's problem. Evidently Illinois does want only the Illinois source wages reported in the Illinois box -- which is different from most other states, but they can do what they want <G>. In any case, all of the wages are taxable in Illinois, and the taxpayer is entitled to credit for taxes paid to other states on income earned there. The taxpayer does need either a corrected W-2 or a letter from the employer stating how much of his wages were actually earned in other states where they were taxable.

MIKEB (talk|edits) said:

21 January 2012
"The taxpayer talked to her employer and they feel that they correctly reported the wages under IL law so that she is being taxed twice on the same income. Any advice from an IL CPA who specializes in IL W-2 income?"

He already filed and claimed the credit, it was disallowed because all the wages were reported on the W-2 as Il. The employer is not changing the W-2 and Il is not allowing the credit.

Marcilio (talk|edits) said:

21 January 2012
One of the common problems is that although wages are earned in a foreign state, the corporate office often reports the wages and pays over the tax to the resident state. For an IL resident who has a W-2 from WI, IA, KY or MI, that's not a problem. Everything is reported on the IL return. If they have income from any other state, they have to file a nonresident return and pay the tax with the return, since nothing has been paid to that state. Then they take the credit for that tax payment on the IL Form CR.

I have never seen a case in which the taxpayer has filed returns with a foreign state if the withholding is paid to the resident state.

Ckenefick (talk|edits) said:

21 January 2012
Everybody remember the Sammy Sosa case?

http://www.blackmankallick.com/articles/2010/03/sosa-strikes-out-and-illinois-residents-lose-the-game-for-now-what-was-sosas-biggest-strikeout/

Joanmcq (talk|edits) said:

21 January 2012
Damn, and I thought NY & CA were aggressive in taxation!

I wonder if NY thought he 'voluntarily' paid tax on income earned in NY?

Ckenefick (talk|edits) said:

21 January 2012
They threw old Sammy a screw ball. I wonder, when the judge read the ruling, if Sammy pounded his chest twice and pointed to the sky...

KatieJ (talk|edits) said:

24 January 2012
Ah, I missed that one! Now I understand the CR instructions.

Here's the deal. An individual who lives in State A, and has income from a source in State B, can be taxed by both states on the same income. New York ex rel. Cohn v. Graves et al., 300 U.S. 308 (1937); Shaffer v. Carter, 252 U.S. 37, 40 S. Ct. 221 (1920); Travis v. Yale & Towne Mfg. Co., 252 U.S. 650 (1920). While the resulting double taxation is generally mitigated by a reciprocal agreement or a credit allowed by one state (usually the residence state) for the tax paid to the other, there is no constitutional or federal statutory requirement that such a credit be allowed. Basically each state can do whatever it pleases.

I'm a little surprised that Sosa's case, or another on the same basis, didn't go beyond the trial court level. However, since it seems to be purely a matter of statutory construction, I doubt that a further appeal would have been successful. So I'm afraid MikeB's client is out of luck.

New York and a few other states do something similar, only to the detriment of nonresidents rather than residents. They apply a so-called "convenience of the employer" rule, which doesn't mean exactly what it sounds like. A nonresident who works for a NY based employer, and who spends any time working in NY on the employer's business during the year, is taxed on 100% of his earnings in NY on a source basis unless the services were performed outside NY out of necessity and not for the convenience of either the employer or the employee. Many states limit the resident credit for taxes paid to another state to taxes paid on income with a source in the other state, and define "source" by their own terms. Thus a California resident telecommuter who works for a NY employer, and spends any time at his employer's NY place of business during the year, is taxed by NY on 100% of his earnings. California, however, will give him credit only for the tax he pays on the income he earned by working IN NY. No credit is allowed for taxes paid to another state on income earned by performing services in California. The NY rule has been litigated repeatedly and the US Supreme Court has denied certiorari every time, most recently in the Huckaby case in 2005.

Legislation was introduced in Congress a couple of sessions back that would have invalidated the NY rule (which also is applied by Delaware, New Jersey, and Pennsylvania), but it didn't go anywhere.

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