How to file return regarding VA Resident with MD Rental Income

[workhard2022]

Case: I have a new client who is a Virginia resident. For tax year 2024, all of his and his wife's income—W-2 wages, interest, capital gains, and K-1 income—is from Virginia. However, he purchased and began renting out a property in Maryland in 2024.

Questions:

1. How should the Maryland rental income be reported for state tax purposes?

2. Should he file a Maryland non-resident income tax return (Form 505)? Are there any specific issues or common pitfalls I should watch out for when preparing Form 505? Is there a way to double-check the form to ensure it’s completed accurately?

3. Can he claim a credit for taxes paid to Maryland on his Virginia resident return (Form 760)?

Thank you very much!

[BobKamman · Accepted solution]

1. How should the Maryland rental income be reported for state tax purposes?

It's income on the Virginia return because they are Virginia residents.  It's also income on a nonresident Maryland return -- there is a reciprocity agreement between the two states (or should I say, between the commonwealth and the state?), but that applies only to earned income.

     2. Should he file a Maryland non-resident income tax return (Form 505)? Are there any specific issues or common pitfalls I should watch out for when preparing Form 505? Is there a way to double-check the form to ensure it’s completed accurately?

Maybe.  Is the federal gross income more than $29,200, excluding Social Security?  

Don't be afraid of out-of-state returns.  I once had a client who didn't feel comfortable preparing his own federal and resident state returns.  But he had worked several tax seasons for a Block office that assigned him to prepare returns for clients with multistate issues.  They were easy as pie, and that was before there was software (but store-bought crust was available).

       3. Can he claim a credit for taxes paid to Maryland on his Virginia resident return (Form 760)?

It usually turns out there is a rental loss and you don't have to worry about that.  But in the rare case where tax is owed to Maryland, some or all of it may be claimed as a credit on the Virginia return. Just follow the instructions.  

[workhard2022]

Thank you so much for your help, Mr. Bob Kamman. Your replies to my questions (1) and (3) make sense.
For question (2), I just want to add that this client's federal gross income is definitely more than $29,200 — it’s actually around $300K. How will this affect the result?

[BobKamman]

The amount of his federal gross income is initially important only to determine whether he has to file a Maryland return.  States use two different methods for figuring tax on nonresidents.  In some cases, the more total income, the higher tax rate on the portion earned in the nonresident state.  In other cases, the tax bracket is the same whether the income is five figures or seven figures.  

It's been a while since I have done a Maryland return, so I don't know how their computation works.  

[workhard2022]

Thank you for your help, Bob