How to transfer form 1040-NR schedule NEC income to states using Proconnect?

[puravidapto]

Let me provide a specific example for the ease of discussion:

An F-1 student with 5 year stay in the United States living in California the whole year, she has wage income from Google as part of training (OPT), and also has capital gains on her personal investment account at Fidelity from sales of Facebook, Amazon, Apple and dividends from IBM, GE, Home Depot.

I believe she needs to file 1040-NR reporting capital gains and dividends on schedule NEC on federal return, but the income on schedule NEC will not flow to the state using ProConnect tax software. How do you solve the problem?

[itonewbie · Accepted solution]

My assumption is that your client is still within the 5 calendar years limit.  The numbers on Sch NEC will not flow.  Your only option is to enter those as adjustments on Sch CA but State & Local > Modifications > CA doesn't have all the relevant line items, which means you will need to improvise.

[puravidapto]

Yes, CA does not have built-in items, but I can write in, just like that if I do not like any of the presidential candidates, I can write in my own. That said, I think PTO should flow the Sch NEC to states, and do the states allocation as well if multiple states involved. I will write a request for enhancement. Thanks for the reply, and I already marked it as the correct answer.

[itonewbie]

When it comes to inpatriates, taxes morphs into a whole different animal because many of the familiar rules no longer apply and discrepancies between how states and Fed determine tax residency add another dynamic to the complexity on top of the usual conformity considerations.  And that is why GoSystem Rs and ProSystem FX remain the software of choice for international tax firms.

If Lacerte/PTO won't get the basics of FEIE for multi-year sourcing and FTC for fiscal year countries right after so many years of complaints and we're talking about returns as produced being wrong, I'm not hopeful they can resolve something that involves much more convoluted tax logic.

For what it is, Lacerte/PTO can handle relatively complex returns decently despite the various flaws.  I've spent too much time trying to get things fixed and so did my friends who have been with Intuit for much muuuuuuuuuch loooooooooooonger.  Saying my serenity prayer and following what it says faithfully save my sanity and make my days more productive.

[taxesareawesome]

This is a great question/discussion. 

I'm very curious : several state tax calculations are tied to federal AGI. In these cases, is the best approach to simply exclude the income reported on Schedule NEC of a 1040NR on the state taxes since it is was not included in the Federal AGI?

I understand if the income was earned, it should be taxed at the state level, however, FDAP income like dividends, capital gains etc reported on Schedule NEC of a 1040-NR for non-resident aliens is extremely hard (next to impossible) to account for on state returns (especially states that use federal AGI as their starting point). 

Would love to hear what the fellow tax preparers are doing when faced with such situations.

[George4Tacks]

https://proconnect.intuit.com/community/form-w-2/help/how-to-create-a-multi-state-return/00/4715 pay particular attention to https://proconnect.intuit.com/community/multi-state-taxes/help/input-multi-state-amounts-in-proconne...

Use US for the state for items that are not state taxable. 

NOTE:  Is the taxpayer a resident of any specific state? That will impact how you treat income. 

[puravidapto]

When state income calculations are tied to federal AGI, it only means that it is the starting point, and it can and should be adjusted when needed. For example, VA provides additions to income

- Interest on obligations of other states

- Interest on federally exempt U.S. obligations

These are items not taxable to federal and not included in federal AGI but are taxable to VA and should be included in state AGI. The dividends and capital gains are taxable items in federal and should be included in VA because they are taxable to VA as well. I put them in "Other - Enter the amount of any other income not included in federal adjusted gross income, which is taxable in Virginia".

The nonresidents cannot take standard deduction, and VA specifically says it keeps it the same as the federal, so nonresidents will take itemized deduction even when they have nothing to itemize. It does not seem to be fair, but there is no other way permitted by the letter of the law. Other states for example, CA and MD, provide a choice.

[puravidapto]

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@George4Tacks wrote:

https://proconnect.intuit.com/community/form-w-2/help/how-to-create-a-multi-state-return/00/4715 pay particular attention to https://proconnect.intuit.com/community/multi-state-taxes/help/input-multi-state-amounts-in-proconne...

Use US for the state for items that are not state taxable. 

NOTE:  Is the taxpayer a resident of any specific state? That will impact how you treat income. 

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This (allocating income to state) does not work on NEC schedule of form 1040-NR, i.e. the income items do not flow to the state even you source them to the state in the input field.

[George4Tacks]

" It does not seem to be fair, but there is no other way permitted by the letter of the law. " As a tax professional you should know that you can not use the four letter F word!