MA Resident has MD and MA taxes withheld

[Grateful2002]

The taxpayer is a MA resident, her duty station was in MD. She is an attorney for DOD.

The taxpayer has MD and MA taxes withheld. She said that she was teleworking. That means that she was living and working in MA, but her duty station was in MD. No other connection to MD. She never lived in MD. I understand why the employer withheld MD taxes since seems MD requires for employers to do so for nonresidents from the states Maryland has no reciprocal agreements with.

My question is, would the income considered to be MD sourced? We need to file MD Nonresident, but it makes a difference if we can claim a full refund of all MD taxes paid, or if we get a credit on MA resident return ( MA only gives a partial credit).

This MD tax announcement supposedly provides the answer. But this is confusing.

https://www.marylandtaxes.gov/.../TaxAlert050420...

The announcement seems to explain that MD did not change it's business nexus rules due to COVID 19. Only employee income earned while physically present in MD is MD income.

But, I am attempting to reconcile two sections in the announcement.

"Maryland employer withholding requirements are not affected by the current shift from working on the employer’s premises to teleworking because taxability is determined by the employee’s physical presence. ... Income is deemed Maryland-sourced income when the income is compensation for services performed in Maryland. "

Ok, great, so taxability is determined by physical presence of the employee. But then it says as an example:

"...Unlike the aforementioned states, Delaware has not entered into a reciprocal agreement with the state of Maryland. Compensation paid to a Maryland nonresident who is teleworking in Maryland is Maryland-sourced income, and therefore, subject to withholding."

Maryland nonresident = Delaware resident, "teleworking in Maryland" This is ambiguous. How do you "telework" in Maryland if you are a nonresident working from Delaware? Why call this example out at all? If the point is to say any nonresident that is working remotely and physically not in Maryland is not Maryland-sourced income, then this example is not very good.

So is that not MD sourced income then? 

[Terry53029]

IT seems your client will be taxed on all her MA sourced income. See link issued 1/6/23 By MA.

https://www.mass.gov/regulations/830-CMR-625a3-massachusetts-source-income-of-non-residents-telecomm....

[rbynaker · Accepted solution]

My understanding (from the wrong side of the Potomac):

On days when she goes to the MD office, she has MD source income and reports it on her MD NR tax return.  If that's 0 days, then it's all MA source.

But let's see if my MD peeps agree:

@sjrcpa @dascpa 

I agree, the announcement makes no sense.  How can someone live in DE but telework from MD?  Panera Bread maybe? 🙂

[sjrcpa]

I agree.

[Grateful2002]

@rbynaker @sjrcpa @Terry53029 

So yes, the announcement is a little bit of a word salad.

 But I concluded that this:

"Compensation paid to a Maryland nonresident who is teleworking in Maryland is Maryland-sourced income, and therefore, subject to withholding."

The wording is a bit ambiguous, but the meaning is that if you're a non-resident of MD who happens to be "teleworking" from a physical location inside Maryland, then your income from that work is Maryland-sourced regardless of your employer's location, and it is taxable by Maryland. The work income of a non-resident of MD who never works from a physical location inside MD is not MD-source income.

And it does say that the taxability is determined by employee physical presence. So to me, that is the answer right there. If MD will end up having issues with us requesting a refund of all taxes, I will show them their ambiguous announcement. 

One thing that does make me question my conclusion is the fact that Department of Defense has been withholding MD taxes from her check for 2 years. I concluded that if there are no reciprocity agreement between the states AND if the income is MD sourced, ONLY then they should withhold. But they have been withholding anyways. I would think DOD knows and understands these tax laws, but perhaps they were confused by that announcement as we were and or during/post covid time and teleworking and all that, there was too much confusion of what is state sourced income and what is not. Hmm.

[sjrcpa]

Maybe MD's announcement did contemplate a nonresident going to one of those teleworking centers in MD.

2 years of MD withholding sounds like your client's fault, not DOD's. She needs to fill out the proper state withholding paperwork.

[rbynaker]

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@Grateful2002 wrote:

I would think DOD knows and understands these tax laws, but perhaps they were confused by that announcement as we were and or during/post covid time and teleworking and all that, there was too much confusion of what is state sourced income and what is not. Hmm.

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While that may seem to **bleep** to allow the old account numbers.

Edit:  Huh.  The censors seem to have gone crazy.  There was an entire paragraph there.  Only thing I can think of is that it did not like the word n-u-t-s.  In brief, FedGov still screws up VA account numbers all the time and it's been nearly 15 years since VA changed the format.

[Grateful2002]

The client said that her employer said that they must withhold MD taxes. We discussed that 2 years ago with her when she asked if she should withhold MA taxes as well since she lives in MA, but MD taxes must be withheld according to her employer. MD taxes nonresidents if there is no reciprocity agreement. Nonresidents who work in MD or derive income from a MD source are subject to the appropriate MD income tax rate for your income level, as well as a special nonresident tax rate of 1.75%. So that was my assumption originally 2 years ago why her employer said that they must withhold. But now I see that if her income if not MD sourced, then this is not applicable.

@sjrcpa @rbynaker 

[rbynaker]

Maybe she could claim exempt under #3 on a MW507?

https://www.marylandtaxes.gov/forms/20_forms/mw507.pdf

And then whatever MA has to start withholding.

[Grateful2002]

To my understanding, this is not an issue going forward as she said her duty station was changed to MA, so seems they do not withhold MD taxes any longer, but I will confirm. ( Not quite sure the meaning of "duty station" here, since she does not serve in military, but works for DOD as an attorney, but perhaps, the federal government assigns you to a certain duty station?!)

Seems, we resolved the 2022 issue for now, and we all agreed based on their announcement that it should not be MD sourced income, thus we will claim zero under MD sourced income on MD non resident return so we get a full refund of all MD taxes paid. Claiming a credit on MA return just isn't as beneficial.