Allocate W-2 State Income

[mfsjpm01]

I have a client who moved from MD to PA mid-year.  Their employer never changed the withholding to PA.  I need to allocate some of the W-2 MD Income to PA.  However, when I go to the PY State Allocation Worksheet, it will not let me change the amount from the W-2.  How do I get the correct amounts into the proper states?

[rbynaker · Accepted solution]

Just change the state section on the W-2 Wks.  So if the W-2 says $50,000 MD Wages & $3,000 MD W/H but you know (from paystubs) that only $30K of the wages were earned while the taxpayer lived in MD and the other $20K while the taxpayer lived in PA you'll change it to:

MD $30,000 Wages, $3,000 W/H
PA $20,000 Wages, $0 W/H

Then things should flow to your PY Allocation Wks correctly.

Rick

[mfsjpm01]

I didn't want to change the W-2 because the taxable income in MD vs PA is calculated differently.  And I thought that's what the PY Allocation Worksheet was for!  Not sure why the allocation worksheet isn't working that way.

[itonewbie]

Before you allocate state wages based on the YTD amounts on the paystub, you should examine the details of his year-end payslip also as compensation paid during residency in one state could have been earned and, therefore, sourced to other other state.  Performances bonus, stock options, and relocation payments are prime examples.

Where compensation was received during residency period in one state but accrued in part to the other state for services performed there, it must still be reported as compensation to the other state and credit would then be claimed, generally in the resident state, for taxes paid to the other state.

You should also ask your client to have the employer issue a W-2C to correct the state wages - SIT will remain as is though, so they'd expect to owe on the PA return, possibly subject to ES-tax penalty, and be out of pocket for a while until they receive the refund from MD.

[mfsjpm01]

This is a simple wage-earner.  No bonuses or stock options.  Just simply the employer never changed to PA withholding.  Because PA and MD have reciprocity, the employer should be withholding PA.  I am expecting the end result to be a refund from MD and balance due to PA.  However, the allocation worksheet will not allow me to show that the income should be reported in PA.  

[itonewbie]

Ah, that's one critical piece of information you didn't provide in your post.  Apparently, the employer and location of service had always been in MD but since the reciprocal agreement cedes to the taxing right to the resident state, the result would be just the same as outlined above, and as you said, MD refund and PA balance due.

In terms of withholding, the question is whether your client submitted a REV-419 to effect the change in withholding.  I'm sure you would have asked your client to submit one by now regardless.

The allocation would then be relatively straight forward, give or take some minor adjustment between MD and PA taxable wages.

Sorry I can't help you with the allocation worksheet in PS since that's not the tax produce I use.