A Tax Note for State Partial Residents and Nonresidents
Last week I filed my taxes on my own, first attempting to use TurboTax’s online software, which went terribly, and later downloading H&R Block’s TaxCut software, which worked out very well for me. If you are going to do your own taxes, I highly recommend downloading software rather than using an online tool, since the latter is very crippled compared to the former. With your own software, you can tweak and test different returns as you see fit. This isn’t always possible with online versions. Furthermore, the downloaded software usually costs the same price or less. This was the first time I filed my own taxes, and I thought it would be a breeze after speaking to a friend who has been doing it for years.
But I ran into a snag.
I started preparing federal taxes for my wife and myself as “married filing jointly”. This is almost always the best way for married couples to file with the federal government, since you’ll each be charged at a higher tax rate if you file separately. (There are some uncommon circumstances wherein filing separately does makes sense, however.) Filing jointly, we are due a refund of $1,300, whereas filing separately, we would have owed the federal government about $1,000. Great!
Once I completed our federal return, I started working on our state returns.
We had to file two state returns, one for New York and one for Illinois. I had been living in New York for all of 2008, but my wife spent half of the year in Illinois and then moved to New York for the second half. After preparing our two joint state returns, I was surprised. The results for Illinois were as expected, but the New York return indicated that we owed the state $900! Never before have I owed New York or any other state more than a few tens of dollars, and 2008 wasn’t a drastically different year for us. The $900 bill struck me as odd.
So with some help from an accountant I know, I did some investigating. After checking each of our tax forms by hand, I discovered that my tax software was interpreting my wife’s Illinois income as taxable by New York State as well. This should not have been the case. I originally thought this was due to a quirk in the New York State tax law, but after reading Publication 88 of the New York State Department of Taxation and Finance, I no longer believe that is the case. The law indeed states that only “New York source income” is taxable by the State, as one would expect. Any tax professionals out there, please correct me if I’m wrong.
The solution came after reading this quote in Publication 88:
If you are married and filing a joint federal income tax return and one spouse is a New York State resident and the other is a nonresident or part-year resident, you are required to file separate New York State returns.
My wife and I would have to file joint federal returns, but separate state returns.
(By the way, this is where my downloaded TaxCut software was much better to use over an online version – I was able to prepare the forms for our joint federal return first, and then easily start over and prepare separate state returns. With the online version, I would have incurred a lot of money in extra charges to do this.)
In filing separate state returns, the tax software got it right the first time. My wife’s Illinois income was taxed only by Illinois, and her New York income was taxed only by New York. The result? A $200 New York refund for my wife and a $35 liability for me. Much better than the original $900 liability for the two of us!
The moral of the story is this:
- Before filing, make sure to check over all your tax forms and don’t blindly trust your computer tax software.
- Nothing replaces a solid understanding of your own tax laws and liabilities.
- Don’t be afraid to do a little digging for information. Tax laws can be intimidating, but finding the information you need can be quick and easy on the Internet.
In my case, following these three tips helped me save about $1,100.
