Tax Question - Working out of state

In My Humble Opinion
1

It’s that time of year! My tax situation changed last year and I need some advice. I left a position early in the year and took a contract (W2) for about 4 months in Kentucky. I then took another contract (W2) in Michigan for about 3 months. I then moved home to Tennessee and started another contract (W2) where I am currently employed. Including a small amount of unemployment, I had 5 income sources, 2 of which I moved out of state.

So I have 2 main questions:

1 - What kind of stuff, if any, can I safely deduct for living out of state?

2 - Is this a situation where a tax professional is recommended, or is it simpler than it seems and Turbotax can handle it?

Any advice would be greatly appreciated. I understand it is just advice, and you are not my accountant, etc., etc.

Thanks in advance!

It seems like this can have specific answers, so I put it in General Questions.

2

Please, Please–If you have a real-life legal/medical/tax question, put it in IMHO rather than General Questions. There you can get factual answers and opinions and advice. Moved.

samclem, moderator

3

About Turbotax. If you download the Deluxe version, you get one free State. Any other States are $42 each. Kentucky and Tennessee may have some sort of agreement making the taxes there easy to figure out - I’m not sure. However I doubt that Michigan does. This might be a situation where hiring a tax professional might be your best choice. Turbotax is going to run you well over $150 probably anyway.

4

TurboTax can handle it, but garbage-in, garbage-out.

You won’t have deductible moving expenses, except maybe for a final move when you settle down for at least a year.

You will probably have living expenses (food and rent, for example) for a temporary work location. Temporary work is generally defined as something away from your tax home that is intended to be less than 12 months, and actually is. (So, for example, a professional could be very helpful in defining tax home and helping you pick one that fits the facts.) All of these expenses are part of itemized deductions; if you don’t already itemize, you might get no or little benefit.

5

Turbotax can handle it, but it’ll also make it incredibly easy for you to bone your taxes-- in fact, it’ll open the door to tax boning and wave you right through.

You need to just hire a professional. Not an HR Block “professional” (ie: one of their folks who took a 6 hour class on a Saturday) but a real, honest to goodness, licensed CPA or EA professional. It won’t cost you all that much more and you’ll know your stuff is done right.

6

What a complicated situation. It’s going to take a good deal of detangling to figure out how much to claim in each state. I agree with the advice to hire a professional.

7

Many apologies for posting in the wrong forum. Please forgive me.

I appreciate the advice so far. We have a tax professional we’ve used in the past, so I think we’ll look her up. I was only considering Turbo Tax if the answers would have been there are no extra deductions available for working out of state.

Thanks!

8

There’s no “working out of state deduction” per se. The travel expense deduction is for situations where you’re working away from your “tax home” for more than one year. Since it goes on Schedule A and subject to a 2% of AGI floor, and it looks as though these contracts were for only a few months each, I wouldn’t bother looking into this deduction unless you have other large itemized deductions such as for home mortgage payments and property taxes.

9

Not qualified to comment on the “deductions for working out of state” per se - what may or may not be a deductible business expense etc.

However, there are tax credits for taxes you pay to another state, when you’re doing your home state tax return. If you are required to pay taxes to the other state - which is likely unless they have a reciprocity agreement with yours - you will need to file in both (all 3 in your case?) locations. For the other states, you file a nonresident return and pay tax on only the income earned there.

The following is from my memory of when I worked in Manhattan for 2 years, while living in another state. I’m sure there are a LOT of nuances I’m leaving out.

As a simplified example, you earn 10,000 a month and your in-state tax rate is 5% (or 500 a month). Your total income tax for your home state would be 6,000.

If you work in state A for a month, with a tax rate of 8% (800 dollars) and state B for a month with a tax rate of 3% (300 dollars), you file a nonresident return with each, paying those figures.

Then you file your home state return. 120,000 income. Total tax bill, 6,000. You get credits for what you paid to state A - up to the amount you’d have paid your home state (i.e., 500 dollars). And you get credits for what you paid to state B - up to the amount you’d have paid your home state - but you paid them less, so you only get a credit for 300 dollars; you still have to remit the 200 dollars to your home state.

So your net tax bill is 6,000, plus 800 (state A), plus 300 (state B), minus 500 (credit for tax paid to A), minus 300 (credit for tax paid to B). Or, a total of 6,300 dollars.

When I was in that position, I screwed up the credit calculation. Gave myself credit for 800 dollars instead of 500 dollars. Got a letter 2 years later from my home state, saying “pony up!!”. Oops. I’d already file for the prior year so as expected I got another letter a few months later.

10

Oooh - one other nuance. Did you still consider yourself a Tennessee resident during the time you worked elsewhere? That would (I presume) impact whether you would file nonresident or part-year resident in the other states. What the ramifications of that are, I don’t know but my guess is: if you were part-year resident in each place, then you don’t fool with the credit scenario I laid out above. If you maintained a residence back in Tennessee, then that meshes with what I had going on.

Still a good idea for you to consult a professional, in my opinion.

(not a tax accountant here, but related to a LOT of them).

11

My residency was always Tennessee, or at least I never used a different address, obtained a new driver’s license, etc.

This has all been very helpful, with the main thing I’m taking away from it is I hate dealing with taxes and will gladly pay a professional to wade through this.

Thanks all!

12

If you were never a resident of more than one state, Turbo Tax… Tax Cut will work fine.

It is not as bad as you think it will be. The Tax software will handle that with no problem whatsoever.
I’ve had similar situations… not quite that many, but close enough

13

It just depends and that’s why you need a tax professional.

For instance, if you worked for a few months in California and make over a certain amount, the Franchise Tax Board (the state agency for taxes) would expect you to file a California State Tax Return. Few states are as aggressive about these things as CA (NY is one that is pretty close, for example), but the point is that it is possible that you have a tax liability in those other states even if you were never an actual resident. For that reason alone, you need someone who is not just a tax professional, but someone nuanced in the laws of the states you visited.

And while I’m not your tax person, I do run a tax business that specializes in helping folks clean up tax messes. A good number of my clients boned themselves pretty solidly by filing returns themselves on TurboTax that were way too complicated to be self prepared.

14

INAtaxadermy, but in general this is what you would do:

TN would be your state of residence.
You would need to file state income tax for MI and KY

For each state, you would only declare the income you earned in that state. The fact that you have multiple W-2s in some states doesn’t matter. You declare all of them.
It’s similar to when I used to be in management consulting. Basically, for each out of state client, I would need to allocate the hours on my timesheet to that state. Then I’d have to file taxes for that income.

Plus the added complexity of living in NJ and working in NY. NJ and NY have some sort of reciprocity agreement so commuters don’t get double taxed.
I also use TurboTax.

15

Maybe.

16

Yep.

It’s quite likely that the OP will need to do so, but it’s possible s/he won’t. It’s worth checking the other states’ rules on taxing income for nonresidents.

Something else that just occurred to me, and may be a nonissue: depending on how much your income totalled up to, with multiple employers it’s conceivable that your total income would exceed the FICA limit. Say that’s 100,000 a year (after which, no FICA taxes), and each of your 3 employers paid you 45,000 dollars. That adds up to 125,000. I don’t know what the appropriate steps are in that situation (but I would assume the 3rd employer could file something saying they’d overpaid, and you’d be due a refund from them or from the government).

If the cost of a professional tax preparer is an issue, you could try doing the stuff yourself using TurboTax or TaxCut and asking the prepaper to review / correct what you’d done. Since you’re doing the bulk of the work yourself, that might save their expensive time (though of course you’ve got to pay for the software for multiple states). A couple of years where we had oddball tax situations I did that (admittedly, the professional was my mother, and she didn’t charge me anything :p).

17

No, you do not bother your former employers, they can’t do anything. You claim a credit for the excess Social Security taxes withheld on Line 69 of your Form 1040. In 2012, this would happen if your wages exceeded $110,100 and you had more than one job covered by SS.

18

Ah - thanks for clarifying that. I based my (incorrect) speculation on the fact that once or twice when I’ve been entering estimates into TurboTax (before W2 actually arrived), I’ve entered too much in the Social Security field - and it pops up something to the effect that “too much withheld, gotta ask employer for money back”. That may have been a percentage thing vs. a total earnings thing though.

So do any of the employers get any of their money back in that case? Or is their portion not subject to the 110,100 limit?

ETA: answering my own question:

Which kinda stinks for the employer, though as noted they may never find out.