How do I compute the taxes on a return that has income from 3 states?

[caroljo]

My clients are married, she is a full time resident of Arizona, he a part time resident of New Mexico and a part time resident of Wyoming, which has no state income tax.  I am coming up with them having to pay a very large amount to Arizona.  What am I doing wrong?

[itonewbie]

Please give us some facts about how you determine your client was FY residency of AZ and PY residents of NM and WY.

Are you saying your client was a domiciliary resident of NM but relocated between NM and WY?

[caroljo]

Hi itonewbie...My clients...wife full time resident of Arizona.  Husband has  lived in New Mexico for a number  years and then in January of 2023 he was transferred to Wyoming.  Wife works in Arizona and he worked in New Mexico for just one month in 2023  and then Wyoming.  So she is a non-resident of the other states and he is a non resident of Arizona.  It is an odd living situation but it seems to work for them.  They both have their own separate homes.

[ljr]

sounds like this should be a mfs situation.

how did they file in prior years?

or

Pick one state to file mfj and then do MFS for the states

[itonewbie]

Before you decide how the filing and income reporting need to be done in each of the states, you need to first consider the domicile of each of your clients. 

Domicile is not the same as statutory residency. Domicile is a common law concept based on intent and facts and circumstances.  Even if the husband was domicile in one state, his domicile may change with the relocation if supported by his intent and set of facts and circumstances.

That would not only determine whether a resident return may need to be filed for the state of domiciliary resident but also how the income needs to be divided and reported based on community property laws.  Note that both AZ and NM are community property states.

From the limited info you provided, the husband was not a statutory resident of AZ.  Why do you think he's a FY resident?  Not unless his domicile is in AZ.

If the husband was an NR of AZ but the couple wish to file MFJ for AZ, they'd file a 140NR and the husband will only be taxable on his AZ-source income.  How the various income would be divided between the couple, again, would depend on their domiciles.

At a high level, without considering your clients' domiciles and assuming the husband will file jointly with the wife for AZ, here's how you'd file the returns:

• AZ: MFJ 140NR with wife for FY; and
• NM: PY resident return for Jan

Credit will then be claimed on the resident state return for state tax paid to the source state on the income that has been subject to double taxation.  You should, nevertheless, bear in mind that division of income based on community property laws does not alter how the income is sourced.

[BobKamman]

Before you consider the domicile of each of your clients, you need to remember that Arizona is a community property state.  She is taxed on half the income from all three states, in the absence of an agreement to disregard community property.  He is taxed on the other half of her Arizona income. New Mexico is also a community-property state, so they pay tax on all his income from there.  New Mexico may give them a credit for some of the Arizona tax paid, and Arizona may give them a credit for some of the New Mexico tax paid.  

[PATAX]

In addition to aforementioned comments, I would closely read the state instructions for each state. Sometimes it is not easy to navigate multi state returns with Intuit.